Because of slumping second-quarter sales of variable annuities, industry observers believe fixed annuities could benefit.
"In our last set of data, we were seeing an explosion on the fixed side — more than we have ever seen before," said Jeremy D. Alexander, president and chief executive of Beacon Research in Evanston, Ill.
Investors nervous about the equity markets are starting to step away from variable annuities, he said.
"It's hard to sell a product that's going down," Mr. Alexander added. "There's a flight to safety."
Estimated sales of fixed annuities jumped to $18.1 billion in the first quarter, up 35% from the same period in 2007, according to Beacon. Book-value annuities accounted for $9 billion, a 74% gain from the same period last year.
Beacon expects fixed annuities to grow another 30%, when second-quarter numbers are released over the next several weeks.
Industry players point to several factors behind the falling sales of variable annuities, which have been in the spotlight because of their revamped features and guarantees.
While insurance executives tend to blame the sales on equity-shy investors, financial advisers believe increasing regulation by the
Financial Industry Regulatory Authority Inc. of Washington and New York could be discouraging their peers from recommending the product.
"Every time there's additional regulation, there are groups of conservative advisers who tend to back off," said Joanne D. Mungall, a certified financial planner with Wealth Management Associates in Foster City, Calif. Even those who conduct appropriate transactions are more reluctant to suggest a VA to clients.
"It doesn't mean they won't present it, but they have to find the client is committed to the sale; advisers will back off unless the client says he really wants to do it," she added.
Carriers hit with falling VA sales include The Hartford (Conn.) Financial Services Group Inc.;
Prudential Financial Inc. of Newark, N.J.; Nationwide Financial Services Inc. of Columbus, Ohio; and Jackson National Life Insurance Inc. of Lansing, Mich.
Year-over-year VA sales have dipped by as much as 20% at some companies, including Nationwide, where individual VA sales fell to $1.1 billion for the second quarter, from $1.4 billion a year earlier.
The second-quarter data from NAVA Inc., the Reston, Va.-based trade association for the VA industry, won't be out for several weeks, but historical data from the group point to slowing product sales as recently as the first quarter.
During that quarter, sales fell to $41.6 billion, compared with $47.8 billion in the fourth quarter and $40.9 billion in the first quarter of 2007.
Industry observers suggest that the tumultuous equity markets are behind the sales drop for variable annuities, making this a less-than-favorable season for the product. Customers are steering away from the equities market, despite guarantees and other features of the product.
"Those are long-term guarantees rather than short-term, and the risk of softening sales may relate most heavily to people who don't have as long a view of things as they should, such that they could," said Noel Abkemeier, principal and consulting actuary at Milliman Inc. of Seattle.
Executives at the insurers also attribute declining sales to consumer sentiment.
"You can never underestimate the emotional side of the business, the degree of safety," said Greg Cicotte, executive vice president and national sales manager at Jackson. "People are emotional and when you see things happening, there's going to be fear."
Advisers could be moving the assets over to fixed investment products, but that would depend on their individual situations, Mr. Cicotte said.
Advisers balk at the notion that they allow clients' short-term market terrors to drive their long-term retirement plans, thus pushing down VA sales at the same time. Rather, they say, compliance makes writing the annuity less appealing, resulting in fewer sales.
Ron Palastro, president and chief executive of R.S. Palastro Financial Planning Services Inc. in Brooklyn, N.Y., continues to advise in favor of a variable annuity. However, he says his peers will reconsider recommending one and look at other products instead.
"People are more inclined to do fixed annuities and money market accounts. They're nervous," Mr. Palastro said.
"But I talk to colleagues, and it's becoming an issue with compliance when putting people into a variable annuity," he said. "You can put some money into a mutual fund portfolio more easily than you can with a VA."
Other advisers see falling sales as evidence that illicit transactions have declined since the New York- and Washington-based
Financial Industry Regulatory Authority Inc.'s rule 2821, governing supervisory procedures, took effect.
"These [disclosure] forms are devastating to anyone who has something to hide," said Leon Rousso, a certified financial planner at an eponymous firm in Ventura, Calif.
"More questions have to be answered and the client has to sign off on it. There can't be errors of omission," Mr. Rousso said.
"Crooks will have a harder time pushing it now," he said.
While customers aren't rushing to buy new variable annuities, most who own them will continue to do so because they don't want to pay surrender charges, said Geoffrey Bobroff, president of Bobroff Consulting Inc. of East Greenwich, R.I.
"The number of new features isn't that significant, and I don't know if any one contract has the most outstanding funds," he said. "Performance across the industry has been weak."
Advisers whose clients would benefit from a variable annuity but have market jitters said they emphasize future financial needs to help investors get past their fears.
"The volatility is scary, and there's risk with that, but there's also the risk that you run out of money," Mr. Palastro said.
E-mail Darla Mercado at [email protected].
