Insurers are rolling out adjustments to their variable annuity products — this time with an air of caution.
On May 1, the date that heralds a slew of final VA filings, carriers were as busy as they were last spring, before the market meltdown.
Carriers update their VA prospectuses each May to include their most recent financial statements. Usually, carriers will time their product changes so that they are added into the updated prospectus.
“What we have seen over the last few months is that at least half of the top 20 VA writers have discontinued sales of at least one living benefit,” said Gerry Murtagh, manager of Ernst & Young LLP's Retirement Income Knowledge Bank, the New York firm's financial products database. “Another thing we've noticed is that there are players in the market who are no longer offering VAs with living benefits.”
Another significant change: Insurers are cutting withdrawal amounts to as low as 4% or 5%, after clamoring last year to raise them to 7%, from 5%.
THREE CATEGORIES
Between November, when carriers were battered by losses on investments and variable annuities, and the middle of February, some 158 product changes were filed with the Securities and Exchange Commission, according to data from Advanced Sales Corp. in Oakbrook Terrace, Ill. The majority of them — 61 — were filed in February.
Primarily, the changes have fallen into three general areas: Carriers are yanking products and features from their shelves; fees are generally rising; and benefits are now less rich, according to John McCarthy, vice president of advanced sales.
“There's some conservatism creeping in, and that can be expected with a 1-in-50-year market cycle,” he said.
Seeking to market annuities, while buffering themselves from the steep losses that have hit carriers in the past few months, some insurers are hedging risk through their products' designs.
For instance, Transamerica Life Insurance Co. of Cedar Rapids, Iowa, revamped its Retirement Income Choice guaranteed lifetime withdrawal benefit rider.
Although annuity holders can choose any available investment option — even 100% equities — Transamerica has balanced that risk by using the open-allocation method, which transfers money into a conservative subaccount if the policy value falls by a cumulative 3% to 5% over any time period.
Higher volatility will cue a transfer to the tamer subaccount, while an increase in policy value or interest rates will move money from the “safer” account to the originally designated investment account, according to the prospectus filed with the SEC.
This concept, which is known as an asset transfer program, isn't new. Prudential Financial Inc. of Newark, N.J., uses a similar concept for its Highest Daily variable annuities — transferring a portion of an ac-count's value into an investment-grade-bond portfolio if certain conditions apply.
The protection and benefits that these programs offer come with a sacrifice. The asset transfer is out of the adviser's hands, said Tamiko Toland, editor of Annuity Insight, an annuity research service provided by Strategic Insight Mutual Fund Research and Consulting LLC of New York.
“It's mitigated by the fact that you lose control of the asset,” she said. “I think that's a reason why [advisers] haven't liked asset transfer programs, but maybe their mind-set will change now.”
ADJUSTMENT OF FEES
The most common VA tweak being introduced, however, is the adjustment of fees and investment rosters.
The Hartford (Conn.) Financial Services Group Inc. has raised its Lifetime Income Builder Portfolios income rider by 0.2% to 1.15% and eliminated its LIB Selects withdrawal benefit rider for new policyholders, as it doesn't require asset allocation and is therefore harder to hedge.
Also, a Feb. 9 version of the carrier's May 1 VA prospectus indicated that the company was on the brink of offering a premium back-guarantee rider that would distribute benefit payments until the benefit amount in the annuity ran out.
The feature would have included investment restrictions as well as a way for the company to reallocate the contract automatically to fixed-income funds if a trigger event occurred — such as the contract's value falling 30% from the benefit amount.
This concept, similar to an asset transfer program, was scrapped in the latest version of The Hartford's annuity prospectus.
Meanwhile, the Pacific Life Insurance Company of Newport Beach, Calif., is pre-paring to launch its Pacific Dynamix Portfolios, a series of passive index-oriented investments, for the in-surer's variable products. The options track large-cap-growth and large-cap value, and small-cap-growth and small-cap-value, indexes subadvised by
BlackRock Inc. of New York, as well as fixed-income indexes that are sub-advised by State Street Global Advisors Inc. of Boston.
A global portion of the portfolios, subadvised by Dimension Fund Advisors Inc. of Santa Monica, Calif., will include international large-cap and emerging markets.
The fees behind the new investment choices add up to 0.65%, which Christine Tucker, vice president of marketing at Pac Life, said is less than actively managed strategies.
PERFORMANCE DRAGS
“When you combine fees and portfolio management, the cost of the variable annuity and the lifetime benefit, that drags performance,” she said.
Another carrier playing up its passive investment choices is Nationwide Financial Services Inc. The Columbus, Ohio-based insurer brought in a new slate of investment options, including the Pimco VIT Low Duration and Foreign Bond portfolios.
The BlackRock Global Allocation V.I. Fund, another third-party addition, is the first international asset allocation choice offered by Nationwide.
The moves demonstrate the insurers' recognition of investors' conservatism.
“They want to limit volatility and provide some predictability in what the guarantee will be,” Mr. McCarthy said.
Whether the VA field will return to its money-making glory days depends on what happens post-recovery.
“You're looking at fewer players in living benefits, if only because the endeavor of selling them is a serious one; it's more grave than before,” Ms. Toland said. “There are more waves around reserving calculations, and you have to have a good handle on that risk and strong limits in place.”
E-mail Darla Mercado at [email protected].
