Benefit performance: have lifetime withdrawal guarantees on variable annuities become too expensive for insurers?[ILLUSTRATION OMITTED]
Earlier this year, Prudential Prudential is the name of two different companies and buildings named after them:
Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. .
That might not sound like significant news, given that in previous years, writers of variable annuities were competing intensely to offer better withdrawal benefits for life. In fact, these benefits were driving sales of variable annuities industrywide in·dus·try·wide
adv. & adj.
Throughout an entire industry: sales that have decreased industrywide; industrywide cooperation. , according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. a report by Conning Research & Consulting. No serious writer could afford to be without one.
But when the markets headed sharply downhill last fall, companies suddenly had to re-assess their offers. The guarantees of locked-in income were great for policyholders who had seen their contract values so rapidly decline. But the declines tested the financial resilience resilience (r·zilˑ·yens),
n of the insurers, and most have spent this year scaling back benefits and/or raising fees on their new contracts. Some have even temporarily stopped selling variable annuities.
"The 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. benefits arms race produced a strategic landscape where competitive advantage was gained by offering numerous guaranteed death and living benefits," wrote Scott Hawkins, an analyst and author of the Conning report, Rethinking Individual Annuities: Key Challenges to Strategic Success. "In the emerging strategic landscape, this competitive advantage will continue, as will insurer efforts to de-risk their variable annuities."
Many large writers this year have either reduced benefits, charged more for them or restricted policyholders from aggressive asset allocations Asset Allocation
The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. . Among those making such changes were Axa-Equitable, Allianz Life of North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. , MetLife, Pacific Life, MassMutual and Hartford 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. Group.
There is a lot on the line for life insurers. "The VA business is part of the individual annuity annuity: see insurance.
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. line, which is one of the major, if not the major, lines of business for the industry in aggregate," said Hawkins. "Its performance has a significant impact on the life industry overall."
Bucking bucking Respiratory therapy Violent resistance by a Pt to intubated ventilation that may cause asynchronous breathing, ergo V/Q mismatching and risk of barotrauma, cardiac arrhythmia, and ↑ intracranial pressure; the newer ventilatory support devices rarely the Trend
Transamerica announced its enhancements in May, and Prudential's enhancements came in late February, just before the stock indexes' March 9 low. Prudential's move is evidence of the confidence it feels in the fundamental design of its dynamic asset-allocation risk management mechanism.
"We have continued to rely on it as a core element ... in the design of our products," said Jacob 'Jac' Herschler, senior vice president of Strategic Initiatives for Prudential Annuities. He added that the mechanism has proved its value to both the company and its clients during the financial crisis.
Still, in early June, the company backtracked slightly on the new design when it said it was planning slight modifications for mid-August.
"We continue to evaluate our offerings and the needs of our stakeholders Stakeholders
All parties that have an interest, financial or otherwise, in a firm-stockholders, creditors, bondholders, employees, customers, management, the community, and the government. to remain competitive in the current environment," Herschler said in a statement.
The industry's lifetime withdrawal-benefits guarantee stipulates that even if contract values plummet--as they did from September 2008 to March 2009--contract owners are allowed to take a steady stream of withdrawals based on a separately calculated benefit base. The withdrawals continue even if the contract value falls to zero. (Prudential calls this feature a protected withdrawal value).
The benefit base can't shrink shrink Vox populi noun A psychiatrist lower than the original investment, but can ratchet up if the contract value grows. Usually, an insurer locks in growth in a product's benefit base if the contract value is higher on an anniversary, or quarterly or monthly. In its Highest Daily Lifetime 7 product and its upgrade, Highest Daily Lifetime 7 Plus, Prudential offers perhaps the most aggressive guarantee by locking in a higher benefit base on any day the contract value is higher. If a contract value declines or grows slowly, companies usually guarantee that the benefit base will grow by a certain rate. Prudential's is 7% compounded annually up to the first lifetime withdrawal.
The ability to make these guarantees comes from a contract provision that allows Prudential to use a predetermined pre·de·ter·mine
v. pre·de·ter·mined, pre·de·ter·min·ing, pre·de·ter·mines
1. To determine, decide, or establish in advance: algorithm to dynamically change a policyholder's allocation of assets. In down markets, the mechanism moves money from aggressive investment options into a bond fund. In up markets, it moves funds into aggressive investments. Herschler said the mechanism had a dampening effect during the down market, which was "something investors appreciated in the past year."
No Human Judgment
The real locations are triggered by a mathematical formula and involve no human judgment. At the most, policyholders can have up to 80% invested in equities or 90% in bonds. Amounts transferred depend on the difference between the account value and the protected withdrawal value; how long a client has owned the living benefit; the amount invested in, and performance of, the permitted subaccounts and bond portfolio; and the impact of additional purchase payments or withdrawals.
So, while the formula may add to one policyholder's bond fund, it may on the same day add to another policyholder's equity funds, Herschler said.
Prudential priced the Highest Daily Lifetime 7 Plus benefit at 0.75% of the protected withdrawal value annually for an individual and 0.90% for owner and spouse--both 15 basis points higher than for the original benefit. The company also reduced the issue age to 45, in order to reduce producer uncertainty over which prospects are qualified.
Transamerica's Retirement Income Choice rider offers compounding 5% growth based on the previous year's highest "monthiversary" value. It also uses a method to manage policy value in relation to the rider's guarantees.
Herschler said that, on average, people invest more in lifetime withdrawal products industrywide than in traditional products that produce lifetime income through annuitization. Traditional products require investors to give up the asset in return for the income stream. Often, the purchases of lifetime withdrawal products are a substantial part of their retirement savings, said Herschler.
Attracting New Money
Prudential's variable annuity sales are down year-over-year, as are sales industrywide. But Prudential's net sales Net Sales
The amount a seller receives from the buyer after costs associated with the sale are deducted.
This amount is calculated by subtracting the following items from gross sales: merchandise returned for credit, allowances for damaged or missing goods, freight flow--a measure of new money being invested--is up. The discrepancy DISCREPANCY. A difference between one thing and another, between one writing and another; a variance. (q.v.)
2. Discrepancies are material and immaterial. is due simply to individuals having less money.
Herschler said assets flowing into Prudential variable annuities are coming from other kinds of investments, and these had fallen in value due to adverse market conditions. More of these new investors are choosing the optional lifetime withdrawal benefits; in the first quarter, 80% of Prudential VA buyers elected the HD 7 suite, up from 75% a year earlier.
Net flows have been low for the variable annuity industry, especially since the 2000-2002 recession, as reported by 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. Until the latest market downturn, sales had been increasing because existing policyholders were making tax-free exchanges tax-free exchange
An exchange of assets between taxpayers in which any gain or loss is not recognized in the period during which the exchange takes place. Rather, taxpayers are required to adjust the basis of assets exchanged. of their variable annuities for new ones with the guaranteed withdrawal features, said Hawkins. With so many exchanges, the industry may be hard-pressed to find more existing policyholders to buttress buttress, mass of masonry built against a wall to strengthen it. It is especially necessary when a vault or an arch places a heavy load or thrust on one part of a wall. sales, unless writers can create a compelling new benefit that prospects would consider an upgrade, he said.
That is but one problem the industry faces. Another is the damage the financial crisis has done to variable-annuity writers. Lower equity values have reduced income derived from underlying investments in the contracts. Lower interest rates have burdened writers that provide rate floors on their fixed accounts. And writers have also seen destruction of capital due to losses in their securities lending Securities Lending
When a brokerage lends securities owned by its clients to short sellers.
This allows brokers to create additional revenue (commissions) on the short sale transaction. programs.
"Those losses were not specifically related to VAs, but they destroyed industry capital overall," Hawkins said. Insurers have had to add capital to back up reserves for the guarantees on VAs, he said.
VA writers will be challenged to rebuild capital and financial strength and manage risks around VA products, Hawkins said. They face several issues: the potential for increased federal regulation; managing general-account assets as people start to retire and move from asset accumulation to decumulation; and maintaining distribution even as the pool of producers dwindles.
Insurers also will have to keep consumers confident in the companies' ability to deliver on guarantees. Hawkins said that distributors will play a role because they have an increasing fiduciary fiduciary (fĭd`shēĕ'rē), in law, a person who is obliged to discharge faithfully a responsibility of trust toward another. responsibility to clients to vet vet
common idiomatic version of veterinarian. the products they sell. "Phoenix is an example," he said. "As they were downgraded, their two major distributors removed them from their approved-product list."
He said he has seen this theme pop up in earnings calls.
Pulling the plug Overseas
Variable annuity writers are also feeling pressure on their overseas businesses. The Hartford Financial Services Group and Allianz Life have stopped selling the products in Japan, and ING Group ING Groep N.V. (NYSE: ING, Euronext: INGA) (known as ING Group) is a financial institution of Dutch origin offering banking, insurance and asset management services. ING once stood for Internationale Nederlanden Groep. said in May it would stop selling single-premium variable annuities in Japan by August.
The Hartford was the top seller of variable annuities in 2008 (as measured by assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. ) with $26.5 billion. In a written response to questions, the company said it suspended sus·pend
v. sus·pend·ed, sus·pend·ing, sus·pends
1. To bar for a period from a privilege, office, or position, usually as a punishment: suspend a student from school. sales "because of increased risks caused by the recent turmoil in the financial markets as well as the challenges posed by the increasingly competitive landscape." The company also suspended sales in the United Kingdom and will not begin sales in Germany.
"We are making changes to our variable annuity business globally to preserve capital and decrease risk," the company said. "We believe these trends will be with us for some time, but [we] may revisit re·vis·it
tr.v. re·vis·it·ed, re·vis·it·ing, re·vis·its
To visit again.
A second or repeated visit.
re the decision should conditions warrant."
Scott Hawkins, an analyst at Conning Research & Consulting, said The Hartford is one of several companies that saw a potential for a retirement asset-accumulation business in other markets. These firms leveraged their experience and knowledge around product design in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. to adapt it in other countries.
"What happened with this particular recession was that we saw that economies are not independent of one another, but are interlinked," he said. "So you had similar sets of guarantees on similar products in different markets, and suddenly those markets simultaneously came under pressure."
Hawkins said the cessation cessation Vox populi The stopping of a thing. See Smoking cessation. of sales by multinational insurers does not necessarily mean they are abandoning particular products or markets.
"They may be leaving themselves in a position to re-enter re·en·ter also re-en·ter
v. re·en·tered, re·en·ter·ing, re·en·ters
1. To enter or come in to again.
2. To record again on a list or ledger.
v.intr. a market once the economy stabilizes," he said. "But this financial crisis ... was unprecedented in the history of individual annuities, at least the financial impact."
* The Situation: The recession has exposed the risks life insurers were taking in variable annuities, perhaps their most important line.
* The Response: Many insurers have reduced their guaranteed lifetime withdrawal benefits and/or raised charges.
* What's at Stake: Insurers need to be major product providers that protect baby-boomer retirements.
Prudential Annuities Life Assurance Corp.
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Transamerica Life Insurance Co.
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Net Sales Rebound Net variable annuity sales from first-time purchasers came out of their 2008 slump in the first quarter of 2009. (Figures in $ millions) Qtr. Ending Qtr. Ending Qtr. Ending 3/31/2009 12/31/2008 9/30/2008 Total Sales * 30,446 33,321 37,850 Net Sales ** 5,085 4,153 4,944 Net as % of Total 16.7% 12.5% 13.1% Qtr. Ending Qtr. Ending 6/30/2008 3/31/2008 Total Sales * 41,953 41,644 Net Sales ** 7,506 7,216 Net as % of Total 17.9% 17.3% * First-time buyers, including inter- and intracompany exchanges, and additional premium from exisitng owners. ** Total sales minus surrenders, withdrawals, inter- and intracompany exchanges and benefit payments. Sources: Morningstar Inc.; NAVA VA Assets by Asset Class % of total assets Equity 42.1% Fixed Accounts 27.6% Allocated Funds 12.9% Bonds 11.9% Money Market 5.5% As of March 31, 2009 Source: Morningstar Inc.