Jackson pares funds to curb VA liability

In an attempt to dial back risk, Jackson National Life Insurance Co. will limit the availability of four funds in its variable annuity offerings and eliminate the choice of a fifth — although some advisers contend that the actions won't discourage them from selling the popular product.

Effective Aug. 29, access to the JNL/Goldman Sachs Emerging Markets Debt Fund, JNL/Lazard Emerging Markets Fund, JNL/Mellon Capital Management Global Alpha Fund and the JNL/Red Rocks Listed Private Equity Fund will be available only through funds of funds, not directly, according to a company filing with the Securities and Ex-change Commission.

The JNL Institutional Alt 65 Fund has been removed altogether.

In a separate filing, the insurer said it will do away with the 8% bonus and annual step-up option available under its LifeGuard Freedom Flex guaranteed-minimum-withdrawal benefit. Jackson also increased mortality-and-expense fees by 10 basis points.

The moves came after Tidjane Thiam, chief executive of Jackson's British parent, Prudential PLC, addressed analysts on a conference call in May and said that the insurer would take steps to curb demand for its VA product, sales of which hit $4.6 billion in the first quarter, up 45% from the previous year.

Analysts at ratings agencies are concerned about Jackson's liability profile and its concentration in variable annuities with living benefits. Reserves tied to variable annuities currently represent close to 60% of total statutory reserves at Jackson, according to A.M. Best Co. Inc.

While the carrier's moves are intended to cool the torrid pace of its VA sales, not freeze them, advisers said the changes probably are insufficient to do the job.

“The Jackson platform's main appeal was that it allowed the adviser and client a full selection,” said Mitchell Kauffman, principal of Kauffman Wealth Services, an affiliate of Raymond James Financial Services Inc. “In a pure sense, moving to a fund of funds reduces that selection and investment control, but they may still be the best option in town.”

Jackson's extensive investment menu and the ability to invest without restrictions have made the insurer the darling of financial advisers, particularly as other insurers have placed limits on equity exposure inside the VA wrapper.

Out of Jackson's 100 investment options, the five funds affected by the change account for less than 5% of total managed assets in variable annuities at the insurer, according to data from Morningstar Inc.

Advisers also reported that few of their clients use the five funds. Rather, clients seem to prefer traditional strategies that employ the JNL/S&P Managed Moderate Growth Fund and Jackson's version of the Pimco Total Return bond fund.

“We are big believers in the asset allocation models; we take the fund-of-funds approach,” said Andrew Murdoch, a financial adviser at Somerset Wealth Strategies Inc., an affiliate of Raymond James Financial. “Emerging markets shouldn't be a big piece of your portfolio anyway.”

David Giegerich, managing partner at Paradigm Wealth Management LLC, liked the Alt 65 fund and expects to make some adjustments once the option is removed. However, he noted that Jackson is still not moving in the direction of its competitors, which have placed more restrictions on investment choices.

Ratings agencies noted that the measures taken by Jackson signal that the insurer is shying away from risk, limiting investments in volatile asset classes such as private equity and emerging markets by restricting them to a fund-of-funds structure and trimming away the riskiest and richest living benefit.

“They're following a trend of derisking by continuing to offer those funds, but in a way, that's prudent to the policyholder and the insurer,” said Donald H. Chu, a director at Standard & Poor's Ratings Services. Instead of putting 50% of a client's investment into one of the riskier mutual funds via an asset allocation model, Jackson can moderate that client's exposure to that particular asset class.

RATINGS PRESSURE

Mr. Chu noted that Jackson's variable annuity business doesn't seem as concentrated when viewed in context with Prudential PLC. However, further VA growth would pressure ratings at Jackson if it became disproportionate, he said.

Thomas Rosendale, assistant vice president at A.M. Best Co., said that for now, the ratings agency is relying on Jackson's judgment that the steps it's taking will slow growth.

The sales level of VAs alone isn't a focal point for the ratings agency, which also is concerned about how heavily Jackson's liabilities are skewed toward variable annuities and the extent to which the firm can increase sales of life insurance or purchase blocks of life insurance, Mr. Rosendale said. Jackson in 2004 bought Life Insurance Co. of Georgia from ING Groep NV.

“I don't imagine it's going to be a precipitous drop [in VA sales],” Mr. Rosendale said. “We'll see what happens.”

E-mail Darla Mercado at [email protected].