High Five.

Following four years of sharp sales growth in variable annuities, insurers are using product development and a growing network of independent producers this year to drive sales to even loftier heights.

Variable annuity sales are on the rise. This is not a recording. The sales boom in variable annuities is now well into its fifth consecutive year of impressive gains. The Variable Annuity Research and Data Service, the Roswell, Ga.-based organization that tracks the variable-annuity business, expects sales this year to top $150 billion, up from $122.6 billion last year. Through the first half of the year, VARDS reported sales of $72.5 billion.

Insurers are using a two-pronged approach to build the business. On the product side, they continue to go beyond the basic package of tax deferral and fund options to offer an array of other features: bonuses, investment-performance guarantees, long-term-care riders, lower insurance fees and surrender charges, higher death benefits, minimum income benefits, dollar-cost-averaging options, automatic asset rebalancing and name-brand asset managers.

Many companies "unbundle" these features--offering them separately rather than as integral parts of the product--to help customers and advisers construct an annuity appropriate to the client's circumstances.

On the distribution side, the most successful annuity companies are selling through independent producers--bankers, wire houses, broker-dealers, financial planners and insurance agencies--rather than through captive sales forces. Instead of selling variable annuities as commodities, these producers incorporate them into the overall financial plans of their clients.

Bonuses Lead the Way

"This year's surge in variable annuities has been favorably affected by those offering bonuses," said Michelle Giordano, an equity analyst with J.P. Morgan Securities Inc., New York. "Companies marketing this product feature most diligently appear to be the ones with the most sales momentum." They were also driving sales last year, she added. Among those companies offering bonuses are American Skandia, Nationwide Life Insurance Co., ING, Pacific Life, John Hancock and Manulife Financial.

About 27% of variable-annuity sales this year are of products that offer bonuses, according to an estimate by Nancy Kenneally, a consultant in the New York office of Tilling-hast-Towers Perrin. In the second quarter of 1999, that figure was about 8%, she said.

As a marketing tool, insurers pay bonuses to investors at the time of the initial purchase. American Skandia, based in Shelton, Conn., pioneered this feature with its XTra Credit product, which credits 1.5% of each purchase up to an accumulated $10,000 and 3% from $10,000 up to $1 million. The credits grow to as much as 5% on amounts invested over $5 million. The feature comes at a price, however, in the form of a longer surrender charge and a lower death benefit, according to a company prospectus. American Skandia sold $5.04 billion in variable annuities through the first half of this year, according to the VARDS Report. It was the fastest-growing variable-annuity seller during the first half, with sales equal to more than 74% of its full-year total last year.

No Free Credits

Critics say that the cost of a bonus product makes it a dubious value, especially if those costs are not apparent to the customer. "I don't think it's a great value if buyers don't know what they're paying, or if they're paying indefinitely," said Giordano, referring generically to bonus annuities. Kenneally said some companies charge a higher mortality and expense fee, some reduce commissions, and some are just willing to accept lower profits.

In June, the Securities and Exchange Commission cautioned investors to be aware of the higher charges and the fact that they can eventually outweigh the bonus's benefit. Also in June, insurance regulators in New York said they would approve annuities with bonuses only if insurers tell customers about the potential costs. Insurance Superintendent Neil Levin announced three requirements: bonuses cannot lead to increased policy replacement or churning activities; insurers cannot mislead consumers about the ultimate cost of the bonus; and the annuity contract must be "self-supporting" so that other policyholders won't be forced to subsidize the amount. American Skandia's Jac Herschler, vice president of variable-annuity marketing, said that by the time the SEC and New York regulators issued their statements, the company had enhanced its disclosures about bonuses and undertaken efforts to educate prospects about the appropriateness of annuities.

Several major companies were reluctant to offer bonuses, "because in the annuity market, you get into issues of selling on bells and whistles," Giordano said. Among them were Lincoln National, which is now expected to roll out a bonus product; Hartford Life; and Nationwide, which introduced its bonus product Jan. 27.

"People were stealing our market," Nationwide spokesman Jeff Botti said. "As we saw our market share dwindle, we decided we had to get in, but only in a way that provides value to the consumer and that was consistent with our value message and integrity."

Nationwide, Columbus, Ohio, chose to offer the bonus--equal to 3% of the invested amount--as a rider on its America's Future Annuity. The rider costs 45 basis Points annually for seven years. "Because ours is a finite charge, it allows consumers to decide whether it makes sense for them to buy it," Botti said. "It's about the time value of money. We'll loan you 3% up front, and you pay the extra charge for seven years." Nationwide sold $4.38 billion in annuities through the first half of the year, which was two-thirds the amount it sold through all of 1999, according to the VARDS Report.

Nationwide also tells consumers they need an annual return of 7.75% for the rider to pay for itself over the seven-year period. If the underlying investments earn more than that, the buyer benefits from the rider; if less, the buyer loses. "What I like is that consumers know what they're paying for, and they're not paying indefinitely," Giordano said. "They're basically borrowing money, and if the market is robust, they'll come out ahead."

The rider halted Nationwide's slide in market share, with about 40% of those buying the variable annuity choosing the bonus, Botti said. "The sales really started going in March," he said. "The bonus has helped our overall sales of annuities. It's given us something to go back to consumers with that is a little different from what our competition is doing."

Product Customization

In September 1999, John Hancock, Boston, introduced its bonus product, Revolution Extra, as part of its Revolution "suite" of three variable annuities. The products offer a choice of six unbundled features and two optional features, CARESolutions and CARESolutions Plus, which the company says were the first in the industry to provide protection against the cost of long-term care with no underwriting.

Hancock's credits are 3.5% on invested amounts from $10,000 to $2.5 million and 5% on amounts of $2.5 million or more. Revolution Value spreads out investments using a six- or 12-month dollar-cost-averaging strategy for customers who are uneasy about market volatility. Revolution Access, for those willing to initially invest at least $25,000, offers no sales charges and no surrender charges.

Over the next 12 months, the company expects the bonus product to be the fastest-growing, said Bruce Jones, vice president of annuity product management. Jones said Hancock sold $550 million of variable annuities in the first half of 2000, a 35% increase over last year's first half. It sold almost as much in fixed annuities, he said.

Not all companies have felt the pressure to offer bonuses. "Our distributors have not asked for it," said Maggie Geurkink, director of accumulation products at Minnesota Life, St. Paul, Minn. "I don't know if that's due to the nature of the synergy of our distribution system. We had a couple of focus groups, and they saw it as problematic."

Minnesota Life, however, saw its variable-annuity assets flow to other companies, but Geurkink said the asset-retention challenge "is broader than this singular issue."

"We approach this from the whole issue of providing value to the client, so our focus is on being proactive," she said. She added that the effect of bonuses on the industry has been "pretty negative," in that bonuses could lead policyholders to believe they are getting something for free and could lead producers to sales abuses such as churning. She said distributors who would not have replaced existing policies with new policies as tax-free exchanges under the 1035 section of the Tax Code were motivated by a new commission.

Minnesota Life's variable-annuity sales were up slightly through August, and Geurkink said the company would sell $300 million to $400 million this year. Its flagship product, Multi Option Achiever, has 25 investment choices, a death benefit that ratchets every three years as part of the package, and free withdrawals that are the greater of 10% of assets or accumulated gains.

The leader through the first half of 2000 in variable-annuity sales was TIAA-CREF, New York, which sells low-cost products primarily through its qualified plans for educators. It began selling after-tax annuities to the public three years ago. The company sold $5.07 billion through the first half, up slightly from the previous year's first six months. Through August, $307.7 million was in after-tax annuities, said spokesman Jim Tolve. About $134.9 million of that amount was to the general public, and the rest was to teachers and their spouses. TIAA-CREF has no agency sales force. All of its products are non-commission, and it relies on direct distribution. The company advertises in newspapers and magazines.

The company's variable annuities come with no surrender charges and have total expenses ranging from 0.37% to 0.59%, compared with an industry average of about 1.25% for mortality and expenses charges alone. It offers six subaccounts. Tolve said the company applauds the actions that the SEC and New York Insurance Department took earlier this year.

Immediate Annuities 

While bonus annuities have been capturing most of the attention this year, many insurers expect immediate variable annuities to be the hot products of the future Among them is Herschler of American Skandia, who said, "That's the story to watch."

The main advantage of an immediate annuity is that it promises income throughout the life of the annuitant. An immediate variable annuity also will provide larger payouts in the future if the underlying investments perform well enough. In return, the annuitant relinquishes control and ownership of principal to the insurer, and there is no death benefit. In recent years, insurers have developed ways to give annuitants some liquidity, especially in the early years of the contract.

American Skandia's new immediate annuity, Advisors Income Annuity, addresses that problem. Introduced in July, the product has a cash-value component that provides both liquidity and protection from falling payments should the underlying investments decrease in value. It also offers a death benefit equal to 85% of premium paid.

For an additional optional annual charge of 1%, American Skandia offers protection against falling equities markets: It will guarantee that the monthly payments will never be less than the first one.

The company reported recently that its customer-service department has been receiving about 1,000 requests for sales kits per week on the Advisor Income product.

Minnesota Life has offered its Adjustable Income Annuity, an immediate variable annuity, since 1996. It limits the downside to equity investing by guaranteeing future payouts of no less than 85% of the initial payout. The product has not yet become a hot item. Geurkink said that about 88% of Minnesota Life's annuity sales are of variable deferred products, less than 10% are of fixed products, and only 2% are of the Adjustable Income Annuity. But Geurkink said the product "opens a lot of sales doors for us" in that people approaching retirement "often talk about income." She added that Minnesota Life's total annuitization block of business is about $30 million annually, with $17 million in the Adjustable Income Annuity.

In the past year, Nationwide has joined Hancock to offer long-term-care benefits through its variable annuities. Giordano said these products are not making an impact, but they're still relatively new. "I'm not sure if distribution forces are trained in them or understand them," she said. "However, I'm hearing that broker-dealer channels are interested in the product and would like to have them on their shelves. It's just that long-term care has not fully emerged yet."

Hancock's long-term-care riders are available in two versions. CARESolutions is available for 10 basis points on the accumulated value and provides nursing home/critical illness waiver of surrender charges that can be triggered by the annuity owner or the spouse, even if that person is not a party to the contract. It provides an elder-care resource, referral and consultation service, and discounts on long-term-care services through Hancock's Advantage List of providers.

CARESolutions Plus, which costs 35 additional basis points of the initial deposit, offers a monthly benefit equal to 1% of the initial investment with no underwriting. It offers inflation protection at 5% a year, compounded annually beginning in year eight.

Nationwide's InvestCare is a single-premium deferred annuity that provides lifelong long-term-care coverage. A portion of the investment pays for the long-term care, and the balance resides in the variable annuity The minimum investment depends on a prospect's age, gender, health and selection of coverage options. A major selling point is that the amount spent on long-term-care insurance would not be lost to a surviving beneficiary under certain circumstances, especially in the early years of the contract; the death benefit is equal to the greater of the amount invested or the contract value.

The contract comes with a mortality expense and administrative charge of 1.4% on the annuity values. Subaccount management charges are extra, and a surrender charge may apply. But Eric Henderson, variable annuity product officer, said the investment performance of the subaccounts of all Nationwide variable annuities has been "phenomenal" with 30 funds outperforming their corresponding indices year-to-date and seven funds returning more than 50% over the year ended July 31.

Managing the underlying investments is also part of American Skandia's strategy. "We're constantly monitoring our asset-manager lineup," said Herschler. "We pick the best of the best; that's what sets us apart." Company management of the portfolio "gives a broker a leg up" in that the broker does not have to worry about a client's portfolio composition and can focus instead on coaching and advising clients, he added.

Producer Push

Insurers that enjoy sales success invariably have gone beyond product design. As Giordano observed, annuities are pushed by salespeople, not pulled by consumers. It is no coincidence, then, that Nationwide's surge in variable-annuity sales coincides not only with the launch of its bonus product, but with its hiring of additional wholesalers in the first half of this year to nearly double that staff from 40 to 75. Henderson said the wholesalers bring the product to producers that actually make the sales in banks, financial-planning offices and regional and national brokerages across the United States.

Jones of John Hancock noted that the producers in these outlets tend to build relationships with clients rather than engage in product pushing. "We distribute our products evenly through independent broker-dealers; our career channel, Signator; and through channels such as banks," he said. "You need excellent wholesaler coverage, and we've fine-tuned that approach."

American Skandia's Herschler said that to be successful, a variable-annuity company needs "powerful distribution, strong products, outstanding technical support, outstanding broker-education support and outstanding underlying investments." To that list he added a reputation for constant innovation and products.

"Brokers are looking to us for new answers all the timer he said. "It's not the bonus product per se, or any of our lineup of products. The product is only one element in a number of deliverables a company must provide."

Despite continually increasing sales for the variable-annuity industry this year, there remains room for improvement. According to the Investment Company Institute, new sales of stock-and hybrid-mutual funds have grown even faster in the first half of this year over the first half of last year with inflows of $781.72 billion, up from $488.67 billion.

Individual Annuity--Separate Account Net Premiums and Deposit-Type Funds

The separate accounts of an insurer represent variable or nonguaranteed investment products, such as variable life and variable annuity products. They are segregated from the insurer's general account assets. The policyholder generally bears the risk in the separate account, whereas the insurance company bears the risk in the general account. Net premium represents gross premiums written, direct and reinsurance assumed, less reinsurance ceded.