Back to the drawing board: why do living benefit guarantees in variable annuities now cost more and protect less?[ILLUSTRATION OMITTED] Hedging programs worked well in 2008's third quarter for variable annuity Variable Annuity An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. writers that offer guaranteed benefits. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. a research report by consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a Milliman Inc., hedging was about 93% effective through October and saved the life industry about $40 billion--money it otherwise would have had to account for in earnings and capital. And with stock prices collapsing, hedging programs protected VA writers from the effects of sinking account values, which shrink asset-based revenues. Hedging costs have been rising, however, and insurers are adjusting both the benefit levels and the amounts they charge policyholders to reflect the new realities, according to actuary actuary One who calculates insurance risks and premiums. Actuaries compute the probability of the occurrence of such events as birth, marriage, illness, accidents, and death. and financial analyst Peter Sun, who co-authored the Milliman report with Ken Mungan. The VA industry has long claimed that guaranteed living benefits boost sales. Axa-Equitable introduced the first living benefit in 1996, a minimum-income feature that guaranteed annual growth in future income until annuitization took place and regular income payments began. More recent benefits that do not require annuitization include guaranteed minimum withdrawal benefits, minimum withdrawal benefits for life and minimum accumulation benefits in the account value. Hedging actually results in cash payments to VA writers from counterparties Counterparties The parties on either side of an interest rate swap or a currency, equity or commodity swap, or to an options or futures position. to equity futures and interest-rate futures. These futures contracts Futures Contract An exchange traded agreement to buy or sell a particular type and grade of commodity for delivery at an agreed upon place and time in the future. Futures contracts are transferable between parties. are sensitive to volatility, and they have become more expensive. Sun said many insurers are responding with some combination of raising the charges for the guarantees or reducing the benefit levels. Dan Beatrice, an analyst in the retirement research unit at LIMRA LIMRA Life Insurance and Market Research Association (now LIMRA International, Inc.) International, said such changes have become common and that the fee increases are often 15 to 30 basis points of the benefit base. Benefit reductions commonly come in the form of slower accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. of the benefit base before policyholders begin the guaranteed payments or the withdrawals, he said. VA writers also are paying more attention to potential vulnerability to leakage LEAKAGE. The waste which has taken place in liquids, by their escaping out of the casks or vessels in which they were kept. By the act of March 2, 1799, s. 59, 1 Story's L. U. S, 625, it is provided that there be an allowance of two per cent for leakage, on the quantity which shall appear in their hedging programs, Sun said. In particular, writers realize there are limits to the equity allocation that can be included in a guaranteed product because of the need for reasonably close tracking between funds in a guaranteed product and its hedge indexes. Without close tracking, VA writers face what he calls a "basis risk," meaning that the performance of the investment options lags its hedge index. Sun said this can occur when actively managed funds incur higher expenses due to increased rebalancing Rebalancing The process of realigning the weightings of one's portfolio of assets. Notes: For example, if your portfolio's proportion of stock has grown too large for your intended assets weightings and risk tolerance, you might rebalance by selling some stock and putting , or when the composition of the indexes changes. "If you think about the composition of the S&P 500, financial stocks now make up much less than they did just half a year ago," he said. Compared to other financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. companies making guarantees, VA writers usually have time on their side as to when they have to make good on them. Variable-annuity guarantees are not usually liquid, and buyers of deferred annuities Deferred annuities Tax-advantaged life insurance products. Deferred annuities offer deferral of taxes with the option of withdrawing one's funds in the form of a life annuity. may hold onto them for many years before they annuitize Annuitize To commence a series of payments from the capital that has accumulated in an annuity. The payments may be a fixed amount, for a fixed period of time, or for a lifetime. annuitize To convert a sum of money into a series of payments. and begin a payment stream. Buyers of withdrawal benefits often must wait 10 years before they may begin withdrawals, and companies usually guarantee annual growth of the benefit base during that period. And as Beatrice pointed out, withdrawals locked in at annual rates of 5% or 6% of the benefit base at the time of election would take 16 to 20 years to deplete de·plete v. 1. To use up something, such as a nutrient. 2. To empty something out, as the body of electrolytes. that base. Effects on Sales VA sales already had fallen 18.1% to $37.8 billion in the third quarter of 2008, according to Morningstar Inc. and NAVA NAVA National Association for the Visual Arts NAVA National Association for Variable Annuities NAVA Navajo National Monument (US National Park Service) NAVA North American Vexillological Association , the Association for Insured Retirement Solutions. Would the product changes hurt sales even more? Sun didn't know, but he said not having guarantees would make things worse. Actually, the success of the living-benefit guarantees may actually cause sales to decline in the short run. As Beatrice pointed out, tax-free replacements of old variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. with new ones have represented the vast majority of sales in recent years. Now, however, with so many contracts "in the money," meaning that the guaranteed amounts exceed the contract values, policyholders would likely be reluctant to surrender such policies. "It's reasonable to expect that there will be less of an opportunity for those sales, and that could drive down industry sales figures sales figures npl → cifras fpl de ventas in 2009," he said. Sales traditionally correlate very strongly with the equity markets. So if equities appear to have bottomed out and then improve through this year, sales could likewise improve, Beatrice said. "One of the interesting things to me is that in the popular press, we often see criticisms of annuities," he said. "Recently they have shifted from offering guarantees you don't need, to 'Geez, it's a great guarantee, but we don't know Don't know (DK, DKed) "Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. if the companies can deliver on them: I think the companies are going to deliver on them, and if people see those guarantees as a demonstrated value, then we have the opportunity for a good sales story in 2009." [ILLUSTRATION OMITTED] Catherine Weatherford, NAVA's president and chief executive officer, said insurers did a "fabulous" job with living benefits. "They proved in the perfect storm, in the most volatile time, that their strategies, planning and hedging worked, even in a scenario that I don't think anyone contemplated," she said. "Having now seen the worst-case scenario worst-case scenario n → Schlimmstfallszenario nt , the industry is going to learn from this economic crisis and collapse of the marketplace and refine and improve its products to make them even more valuable to the investor of the future." Weatherford characterized char·ac·ter·ize tr.v. character·ized, character·iz·ing, character·iz·es 1. To describe the qualities or peculiarities of: characterized the warden as ruthless. 2. the current benefit changes as a "tweaking tweaking Vox populi Fine-tuning to produce optimal results ." Product Changes Among companies that have made changes to their annuities is Axa-Equitable. The company eliminated the 6.5% guaranteed annual accrual on the benefit base of its income benefit and raised the charge on the 6% accrual feature to 80 basis points from 65. It lengthened length·en tr. & intr.v. length·ened, length·en·ing, length·ens To make or become longer. length  en·er n. availability of the reset option, which allows clients to reset the
benefit base to lock in market gains, to age 80 from 75.
It also discontinued dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: its stand-alone minimum withdrawal benefit for life, but added a feature to the Accumulator A hardware register used to hold the results or partial results of arithmetic and logical operations. (processor) accumulator - In a central processing unit, a register in which intermediate results are stored. product that allows conversion at age 85 from a minimum income benefit to a withdrawal benefit for life. "We now think we have the best of both an income benefit and withdrawal benefit, all in one feature," said Steve Mabry, senior vice president of annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. product development. "We had been selling very little of the withdrawal benefit; 90% of people were electing our income benefit." Axa made no changes to its minimum accumulation benefits, which offer a 100% or a 125% principal guarantee of account value. [ILLUSTRATION OMITTED] Mabry said that with so much interest in income guarantees as a top financial concern, he expects financial advisers will continue to focus on variable annuities. However, he said sales volume will be challenged due to the deflation deflation: see inflation. deflation Contraction in the volume of available money or credit that results in a general decline in prices. A less extreme condition is known as disinflation. of assets in IRA Ira, in the Bible Ira (ī`rə), in the Bible. 1 Chief officer of David. 2, 3 Two of David's guard. IRA, abbreviation IRA. and 401(k) rollovers. "You still need to be in equities" he said. "You never know when the market is at the bottom, and you hate to miss when the market turns around. He predicted guarantees will continue to show their value. "and we think we're a very strong guarantor guarantor n. a person or entity that agrees to be responsible for another's debt or performance under a contract, if the other fails to pay or perform. (See: guarantee) GUARANTOR, contracts. He who makes a guaranty. 2. and are very comfortable in our position." According to Sun, market stress has highlighted risk exposures that have so far been unhedged, such as a slowdown For articles with similar titles, see Slow Down (disambiguation). A slowdown is an industrial action in which employees perform their duties but seek to reduce productivity or efficiency in their performance of these duties. in amortization revenue of deferred acquisition costs. Many writers pay as much as 8% in commissions, bonuses and other costs to sell an annuity. These costs are amortized over the expected future revenue streams from the product, but when account values fall. revenue declines. [ILLUSTRATION OMITTED] Sun said it is possible to hedge to protect future revenue streams. [GRAPHIC OMITTED] * The Trend: Variable annuity writers are cutting back on their living benefits and/or raising charges for them. * Behind the Trend: Volatility in stock indexes has caused investable assets to shrink. * The Significance: Benefits changes may not much affect consumer behavior, since they still provide protection in a shaky economy. To Guarantee or Not to Guarantee Guaranteed benefits are one option. Another is using a variable annuity as an active-management platform. That's what independent adviser Brian Schreiner, vice president at Schreiner Capital Management in Exton, Pa, does for his clients. Schreiner uses Jefferson National Life Insurance Co.'s Monument Advisor no-load variable annuity, which offers more than 200 investment options at a fiat [Latin, Let it be done.] In old English practice, a short order or warrant of a judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act. fee of $20 a month. Among the options are several bear-market funds that gain value when stock indexes sink. The Jefferson National product is useful for advisers such as Schreiner because it allows unlimited trading. And that's exactly how Schreiner uses it. "We take a tactical approach to investing," he said. "We slice up Verb 1. slice up - cut into slices; "Slice the salami, please" slice cut - separate with or as if with an instrument; "Cut the rope" the global economy into 20 or 30 different slices and use a rotational strategy based on relative strength. We seek to hold areas of the global economy that are strong and sell areas that are weak." Schreiner said 2008 was "great for us" because the trend was so decided. This has not been the type of market to own, he added. That's where the Rydex bear-market funds come in. Some are even leveraged. "When we get a strong signal, we'll use that leverage," Schreiner said. When he is less sure, he goes to cash. "Overall, our strategies have less overall volatility than the S&P 500," he said. "The reason is that we spend so much time in cash." Schreiner offers clients four portfolios. In 2008, they returned from 2% to nearly 23%, a far cry from the steep losses in stock indexes. Laurence Greenberg, president and chief executive officer of Jefferson National, said Monument Advisor is primarily used by independent, fee-based advisers who believe that by managing money, they can accomplish what a guarantee would--without the cost of the guarantee. The efficient, electronically based platform helps them to try. About 10% of the annuity's sales are direct to self-motivated consumers managing their own money, but Greenberg said that managing money is not easy and that there is a "real role" for financial advisers to fill. Variable annuities with living-benefit guarantees are not likely to offer or to add alternative investments like bear-market funds. "Those funds cannot he adequately hedged," said Steve Mabry, senior vice president of annuity development at Axa-Equitable Life Insurance Co. "We'll not be adding any funds that aren't 'hedgeable.'" How The Futures Contracts Work Variable annuity writers use equity futures and interest-rate future swaps as hedges against a falling market. [ILLUSTRATION OMITTED] Futures trade on "futures exchanges" such as the Chicago Mercantile Exchange and the Chicago Board of Trade. [ILLUSTRATION OMITTED] VA writers and counterparties--financial institutions or others with opposite views on the market direction--agree to the terms of the futures contract. These contracts are issued by clearinghouses sponsored by the futures exchanges. [ILLUSTRATION OMITTED] Counterparties pay insurers in cash when the contract term expires. Source: Milliman (Peter Sun) Learn More Axa-Equitable Life Insurance Co. A.M. Best Company # 06341 Distribution: Career agents, broker/dealers, banks, financial planners Financial Planner A qualified investment professional who assists individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve these goals. Jefferson National Life Insurance Co. A.M. Best Company # 06475 Distribution: Fee-based advisers, broker/dealers, direct For ratings and other financial strength information visit www.ambest.com. Consumers and Market Woes Online surveys in April and October 2008 show how Americans reacted to increasing market volatility. Ranked guaranteed income as a top financial priority: April 62% October 78% Changes to financial portfolios (October only): Made changes 21% Thinking about changes 25% Not planning changes 54% Listed protection from outliving retirement savings as a priority: April 59% October 71% Sought financial information from: News & financial Web sites 48% Newspapers 45% Financial professionals * 35% Magazines 15% * Ranked 'most trustworthy of sources' by survey respondents. Methodology: 400 randomly chosen U.S. consumers between 35 and 70 with household incomes of $75,000 or higher. Source: Axa-Equitable surveys conducted by OTX Research. Note: Table made from bar graph. U.S. Individual Variable Annuity Sales Third Quarter 2008 Year-to-Date Company Name ($000) ING 11,384,961 TIAA-CREF 10,744,081 MetLife 10,526,470 AXA Equitable 10,310,935 Lincoln Financial Group 9,006,229 Prudential Annuities 8,067,088 John Hancock 7,234,135 AIG 6,964,999 Hartford Life 6,726,817 Pacific Life 6,066,613 RiverSource Life Insurance 5,873,212 Jackson National Life 5,053,947 Nationwide Life 3,231,000 AEGON USA 2,609,776 Allianz Life 2,157,565 Genworth Financial 1,993,363 Fidelity Investments Life 1,974,937 Sun Life Financial 1,522,962 New York Life 1,383,945 Massachusetts Mutual Life 1,113,546 Top 20 Variable Writers $113,946,581 Total Industry $122,000,000 Top 20 Market Share 93% Source: LIMRA International |
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion