Advisers may complain about variable annuities, but most still endorse the product.
According to an
InvestmentNews online survey conducted Jan. 29 to Feb. 17, more than 68% of 1,851 advisers polled said they were currently recommending VAs to their clients, despite higher costs for popular riders and less-generous benefits.
In fact, 41.8% of those surveyed said they were recommending the products more often than they did last year, while 45.6% were recommending them as often as they did last year. Many of those who recommended VAs said that clients need the guarantees and equity exposure the products provide.
Only 12.6% said they were recommending variable annuities less frequently than they did last year, citing concerns about stock market performance and the financial stability of carriers.
"Variable annuities are coming back into favor for some advisers, but others are still sitting on the sidelines," said Bob Whalen, president of Chicago-based Brewer Financial Services LLC, which manages $700 million in assets.
Still, even those who recommended the product were uncertain about how to incorporate the once-popular withdrawal benefits.
"I don't make a big use of the guarantees," said Ray Benton, a Denver-based adviser with Lincoln Financial Advisors Corp. of Fort Wayne, Ind., who manages $70 million. "The fundamental purpose is to get exposure to the stock market. If you load up the annuity with costs, it invalidates the exposure."
The race among insurers to load guaranteed benefits onto their products rose to a fever pitch last summer. But by last fall, after tumbling equity markets decimated VA account balances, the guarantees — which became worth far more than the newly lowered value of the accounts — came to haunt the carriers, which were also reeling from massive investment losses, lower fee income and the threat of lower ratings.
As a result, insurers are in retreat.
"We are seeing carriers act a little jittery, trying to pull back some of their recent enhancements," said John McCarthy, vice president of Advanced Sales Corp. of Oak Brook, Ill.
"The pace of changes has been hot and heavy since December, and we expect this to continue up through the May prospectus-filing season," he said.
Axa Equitable Life Insurance Co. in New York led the way when it eliminated the 6.5% guaranteed-minimum-income benefit on its Accumulator VA and raised fees on a 6% income benefit to 0.8% from 0.65%. Others followed, including ING Groep NV of Amsterdam, Netherlands.
ING adjusted its LifePay Plus rider, a guaranteed-minimum-withdrawal benefit. Previously, clients ages 591/2 to 75 could withdraw 5%. Now, that age range has been split into two groups, allowing those ages 591/2 through 64 to take 4% withdrawals, while those ages 65 to 75 can still take 5%.
Ratchets, which allow contract holders to lock in market gains, went from a quarterly basis to an annual basis. Also, annuitants are no longer allowed to use a 75/25 equities-bonds blend when choosing the rider; they now must choose either a 70/30 blend or a model presented by ING.
The cost of the rider also rose to 0.85% from 0.75%.
"It became apparent by November that this wasn't an ordinary market scenario," said Bill Lowe, chief executive of ING's U.S. annuity department.
"Most companies did what they could do quickly, which was to raise prices or pull the benefits. It's all about how much risk will a company take and how are they being adequately compensated for it, based on the current environment," Mr. Lowe said.
Instead of merely raising the fees, some carriers eliminated riders altogether. Nationwide Financial Services Inc. of Columbus, Ohio, cut its Capital Preservation Plus lifetime-income benefit after the cost of hedging skyrocketed, according to Eric Henderson, senior vice president for individual investments.
He said the carrier would also raise its L.Inc income-benefit price to 0.9% from 0.75% and cut back on investment options, effective March 2.
"Fifteen basis points [0.15 percentage points] won't cover the cost of hedging, and 15 basis points plus ratcheting back on investment choices gets you closer but still doesn't get you there," Mr. Henderson said. "We continue to monitor hedge costs, and we may need to make more changes."
In light of the financial crisis, some advisers have adjusted the way they choose their insurers, concerned that the new riders might require them to change their planning.
Some 54.5% of those polled were concerned that the carriers may not be able to make good on minimum return guarantees for VAs. Of the respondents, 45.5% didn't feel that this was a concern.
"Some insurers have eliminated the withdrawals, and that affects the strategies," Mr. Whalen said. "Clients don't want to put more money into carriers that are restricting those withdrawals."
Having seen the insurers' struggles, others decided to diversify their VA providers through multiple contracts.
"When the companies got into more-aggressive income guarantees, they ran into trouble," said Russell T. Hill, president of Long Beach, Calif.-based Halbert Hargrove, which manages $1.1 billion. He divides clients' dollars among a handful of top-rated carriers.
However, not all advisers view these product changes as a bad thing.
"It's a way for them to lower their exposure and their cost of hedging," Mr. Benton said. "At least the better companies know what they're doing and have taken the steps to protect their assets."
E-mail Darla Mercado at [email protected].
