NEW YORK - Variable annuities increasingly are being exchanged for other VAs with more and better guarantees, though less new money has been coming in.
A significant amount of client assets that used to go into variable annuities instead is going to other types of investments, mainly exchange traded funds and separately managed accounts, industry observers say.
VA sales last year were $133.4 billion, up 1.2% from the amount in 2004, according to the National Association for Variable Annuities in Reston, Va. But total net flows were $20.5 billion last year, compared with $40.2 billion in 2004, indicating that not as much new money is going into variable annuities.
One reason for the lower net flows is increased regulatory scrutiny of variable annuities and negative media coverage, according to Michael DeGeorge, NAVA's general counsel.
Another reason is that clients are more educated about variable annuities and know that the investment might not be right for everyone, said Patrick Ferrer, national sales director of Jefferson National Life Insurance Co. in New York. "It used to be that VAs had such a sales-driven culture, everyone was getting into them," he said.
Insurers that offer variable annuities are aggressively attempting to increase flows by targeting baby boomers and enticing them with income, withdrawal and death benefit guarantees. But those attempts often result in 1035 exchanges from one VA to another, rather than new sales.
"Advisers are consolidating client assets into the large and financially sound insurers because of the guarantees," said Clifford Jack, executive vice president and chief distribution officer of Lansing, Mich.-based Jackson National Life Insurance Co. "It's important that the insurer is financially strong enough to make good on the guarantees."
A major impetus for the 1035 exchanges is the regulatory prohibition against VA insurers' marketing to their current client base, according to John Kawauchi, vice president of business development for Nationwide Financial Services Inc. in Columbus, Ohio. "The exchange advice has to come from the broker, who wins by getting a new commission, and the client wins by getting a better contract that includes living-benefit guarantees," he said.
"A significant amount of VA assets will migrate to the lowest-cost platform," said Mr. Ferrer, whose company specializes in low-fee, no-frills variable annuities.
Part of the VA flow problem can be laid at insurers' doorsteps.
"In the recent bear market, many VAs went underwater, and clients who bought at the peak blamed the insurer, causing them to want to switch to a different company or investment," Mr. Kawauchi said.
"There's been a shift among advisers from commissions to fees, and many VA insurers haven't done a good job at penetrating the fee-based market," Mr. Jack said. "There's a lack of new advisers offering VAs - no new blood."
Mr. Jack blamed licensing and regulatory hurdles to the sale of variable annuities.
In addition, many broker-dealers have clamped down on variable annuities due to the recent regulatory scrutiny, Mr. Kawauchi said.
Variable annuities also haven't been a significant product for the "hybrid" advisers that accept both fees and commissions, Mr. Jack pointed out.
"Some of the money that used to go into VAs is going to the fund companies that have retirement platforms," Mr. Kawauchi said. These investments are becoming popular with boomers and others who are on the verge of retirement, he noted.
"Assets from many investment sectors - not just the VAs - are going into ETFs, which have become extremely popular," Mr. Jack said.
"Also, a portion of the money is going to SMAs," he said. "There may be some going to hedge funds, as well, although not as much as to the ETFs and SMAs."
Commodities and real estate investment trusts also are competing for VA dollars, Mr. Ferrer added.
Despite the recent publicity regarding some insurance agents who try to convince clients - mainly elderly ones - to sell their variable annuities to buy equity index annuities, the effort has had limited success.
"EIAs are not cannibalizing the VAs, because those two products have different producer bases," Mr. Kawauchi said. Variable annuities are sold by advisers with a securities license, while the vast majority of equity index annuities are sold by agents with an insurance license, he said.
"The money going into EIAs is coming mainly from other types of fixed annuities," Mr. Jack said.