Nationwide plans VA that hits the bond button

In an attempt to buffer its variable annuity clients’ accounts from market volatility, Nationwide Mutual Insurance Co. expects to launch a program that will shift funds into fixed-income investments when the stock markets dip.

The insurer is eyeing a fall release for the program, said Eric Henderson, senior vice president for individual investments at Nationwide Financial Services Inc.

“We currently offer strong guarantees, but the dynamic allocation stabilizes your account balance [in times of volatility],” he said. “A steep drop in account balances is unnerving to the client.”

The program is used in conjunction with a living benefit at a number of VA providers, including Prudential Financial Inc. and Transamerica Life Insurance Co.

Mr. Henderson said that though a volatility dampener does reduce the variable annuity’s potential upside, the strategy allows Nationwide to continue offering benefits to clients. The income benefit base of Nationwide’s L.inc living benefit grows at a rate of 10% annually for 10 years or until the annuity holder makes his or her first withdrawal.

Last May, the insurer raised its payout rate to 5.25%, from 5%, which Mr. Henderson said likely had a hand in Nationwide’s 32% year-over-year increase in VA sales in 2010.

MIXED FEELINGS

Financial advisers have had mixed feelings about dynamic-allocation programs, as some insurers will move the money out of the fixed-income investments and others won’t.

“With some products, once you’re in the fixed-income investments, you’re done,” said John McCarthy, product manager for annuity solutions at Morningstar Inc.

“That’s really restrictive,” said Mitchell Kauffman, a managing director at Kauffman Wealth Services Inc., an affiliate of Raymond James Financial Services Inc.

He had had such an experience with Allianz Life Insurance Company of North America’s High Five contract, which had a feature that allowed the insurer to shift money from variable accounts into fixed accounts.

MISSED RALLY

“[Allianz] was hoping it would give the conservative investor who needs a living benefit some confidence,” Mr. Kauffman said. “But the problem is that now that these contracts are nearing maturity, they’re mostly invested in the fixed accounts.”

Those clients missed out on the 2009 market rally, Mr. Kauffman said.

What types of fixed-income investments Nationwide chooses for its dynamic-allocation strategy could also be a determining factor in whether advisers gravitate toward it. For instance, Prudential uses a bond portfolio, while Transamerica moves into a fund that shorts the S&P 500 as a way to protect against wild market movements.

“How does it fare for the client if you’re running to shelter in a bond fund, when bonds are losing value because of rising interest rates?” Mr. Kauffman asked. “As advisers, we want to have control over the investments, and we give this up hopefully in exchange for a better living benefit.”

E-mail Darla Mercado at [email protected].