SUN-SATIONAL BUT IS IT SUSTAINABLE? SUNAMERICA’S GROWTH THREATENED BY PRICE PRESSURES

Eli Broad’s SunAmerica Inc. shined in 1997. Wall Street was hot on the company’s stock, which peaked at $44.75 in early December, and sales of its core product, variable annuities, surged 44%.

But some experts see the firm’s rise eclipsed by an impending price war, an almost singular focus on the annuities – which account for about half of sales – and competition from such giants as Hartford Life Co. and the Equitable Life

Assurance Society of the United States.

Growth has been stoked by acquisitions, which may not continue at the rapid pace of the past 10 years. And as SunAmerica continues to scout for deals (see related story on Page 3), the firm’s stock has slipped, trading at less than $38 last week.

One analyst even has pronounced SunAmerica the most expensive stock in the life insurance sector, rating it “neutral” in his first review of the company.

Mr. Broad (pronounced “Brode”), the company’s high-profile CEO since its founding in 1989, flares at suggestions of a cloudy future for SunAmerica, firing back that its competitors may be spread too thin. “We are more focused than they are,” he says.

Mr. Broad made a fortune developing homes for baby boomers before deciding in the early 1980s to sell them retirement products. He has turned SunAmerica into one of the largest players in financial planning by snapping up distressed insurance companies and more recently by buying broker-dealers.

“We are not in all the businesses they are in. We want to be viewed as a retirement specialist and do that better than anyone else.”

Indeed, the 64-year-old Mr. Broad is gunning to again double the company’s 3% share of the variable annuity business over the next three or four years. It has risen to eighth from 17th in 1994. And SunAmerica’s flagship Polaris variable annuity was one of the best performers of 1997.

Betting on boomers

Mr. Broad has staked a huge part of the firm’s success on sales of variable annuities, which are essentially mutual funds in
an insurance wrapper, betting that they will become the retirement savings vehicle of choice for the country’s 76 million baby boomers. Industrywide, variable annuity sales are expected nearly to double to $153 billion by the end of the decade, according to the Variable Annuity Research and Data Service Report, a Marietta, Ga., researcher.

Variable annuities accounted for 47% of SunAmerica’s $5.3 billion in sales in fiscal 1997, down from 54% in 1996. The company’s broker-dealer units generate 32% of annuity sales, a figure the hard-driving Mr. Broad wants to hoist to 40% during the next several years.

If investors head for the exits when the market drops, they can always transfer their assets to Sun-America’s fixed annuities and guaranteed investment contracts, which are even a higher-margin business.

“We are one of the few companies that will do well whether markets are good or bad,” he says.

Mr. Broad also dismisses competitive pressures – even the price war waged by Nationwide Financial Services Inc.

In November, the Columbus, Ohio-based competitor launched a variable annuity with insurance charges that are about 25% less than the industry average of 1.27%. That would squeeze SunAmerica in particular, because Polaris is the most expensive variable annuity line in the industry with average fees of 2.44%, according to a report by J.P. Morgan Securities Inc. in New York.

Valley Forge, Pa.-based Vanguard Group has one of the least expensive variable annuities, with fees averaging 0.82%.

“SunAmerica is going to see its stock fall because it has high fees and relatively low commissions; they have a strategy for very high corporate earnings, which will be difficult to sustain,” says Wade Dokken, deputy chief executive officer of Skandia Insurance Co. in Shelton, Conn. Its competing Advisors Plan variable annuity has average fees of 2.43%.

SunAmerica pays commissions of 4% to 5% on its variable annuities, but some vendors, including Nationwide, pay agents as much as 6%.

Analysts
also question SunAmerica’s ability to increase revenues if its 10-year acquisition binge tapers off.

Last year, buyouts of two broker dealers, Keogler Morgan & Co.(now Keogler Investment Advisory) and Financial Services Corp., both in Atlanta, swelled its army of registered reps to 9,100. That’s an increase of 36% from 1996; this year another 900 reps are expected to be hired.

The acquisitions have given SunAmerica the fourth-largest retail distribution network in the United States. But that may not be enough.

More muscle needed?

As SunAmerica dukes it out with competitors for dwindling shelf space, it may not have the muscle to compete with much richer competitors. Hartford and Equitable, for example, have stronger name recognition and more clout to cut fees paid to mutual fund companies.

SunAmerica is hoping to bolster its name recognition by spending millions of dollars on television advertising, including a spot it plans to air Sunday before Superbowl kickoff. But it’s a brutal game.

“SunAmerica is going to be challenged to maintain their shelf space against people like Hartford Life, which sells more per year than (SunAmerica) manages in variable annuity assets today,” says Colin W. Devine, a senior equity analyst at New York-based Salomon Smith Barney, which is owned by the Travelers Group, a competing insurer .

Hartford, the industry’s No. two behind teachers’ pension fund TIAA-CREF, had $44.7 billion in variable annuity assets as of Sept. 30, compared to SunAmerica’s $11.3 billion, according to data from VARDS.

Nationwide, the largest distributor of variable annuities through independent financial planners, cut costs on its newest product by paring commissions about 0.25% and negotiating sweeter deals with the firms that manage the investments.

It’s too soon to tell how consumers will respond. Some point out that Nationwide’s new lower-cost annuity isn’t as cheap as it appears because customers choose from a menu of death benefits that can bump up the price. But Nationwide, a
ccording to analysts, already has made a few big-ticket sales, with deposits ranging from $500,000 to $1 million. Nationwide officials declined to give sales figures.

Mr. Broad and other competitors say consumers want more financial advice than low-cost variable annuity providers are able to offer.

“No one buys a variable annuity by picking up the phone,” he says. “It is typically sold as part of a financial plan for retirement.”

Of course, the same debate shook the mutual fund industry not long ago.