The art of the up sell: new products drive variable annuity replacement sales.For as long as anyone has kept track, net premium flows of variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. have been low. In 2005, they fell to 15% of total sales then rose to 18.9% in 2006. Net flows, defined by trade association 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, as total premiums minus surrenders, withdrawals, policy exchanges and benefit payments, are a measure of new money flowing into VA products. Low net flows mean that most sales activity occurs when policyholders trade in old policies for new ones. On the surface, low net flows imply an industry unattractive to first-time buyers first-time buyer n → persona que compra su primera vivienda first-time buyer n → personne achetant une maison ou un appartement pour la première fois first-time buyer and with weak ability to generate revenues from outside sources. But that is only part of the story. The other part is that competition is intense among insurers to develop better products, and both advisers and consumers benefit from those new offerings. The tax-deferred nature of variable annuities also stimulates policy replacements, since under Section 1035 of the federal tax code these exchanges are not taxable events Taxable event An event or transaction that has a tax consequence, such as the sale of stock holding that is subject to capital gains taxes. . The creation of living benefits available on new variable annuities has driven sales and policy-replacement activity over the past two or three years, said Michael DeGeorge, general counsel at NAVA. For an additional fee, these living benefits hedge against market risks by locking in protected values Protected values are values that people are unwilling to trade off no matter what the benefits of doing so may be. For example, some people may be unwilling to kill anyone even if it means saving many more or cloning for the sake of medical advances. . "If the replacement is determined by the financial representative and the customer to be in the customer's best interest, it is a positive for the consumer," he said. In all likelihood, recent sales numbers (see chart on page 49) reflect inflated total sales more than a deflated de·flate v. de·flat·ed, de·flat·ing, de·flates v.tr. 1. a. To release contained air or gas from. b. To collapse by releasing contained air or gas. 2. net flow, said Frank O'Connor, manager of 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. Research and Data Service products at Morningstar. That is because consumers bought many variable annuities in the late 1990s and in 2000 when stock prices were still surging, and those annuities have been coming out of their surrender-charge periods. L-share annuities, sold later but with shorter surrender periods, also have been emerging from these charges. "The positive spin is that policy replacements are going into products that didn't exist in 2000," O'Connor said. "The more cynical view is that advisers have hopped onto their clients to roll those policies into new ones with new surrender periods to generate a new commission. I suspect there has been a little of both." While critics of variable annuities might see cannibalization can·ni·bal·ize v. can·ni·bal·ized, can·ni·bal·iz·ing, can·ni·bal·iz·es v.tr. 1. To remove serviceable parts from (damaged airplanes, for example) for use in the repair of other equipment of the same in the sales statistics, O'Connor said cannibalization is only a side effect of an intense period of product development. Hartford Life in 2002, for example, introduced a minimum withdrawal benefit that guaranteed at least the return of premiums over a number of years. The industry subsequently guaranteed periodic withdrawals for life. Next came a step-up step-up A scheduled increase in the exercise or conversion price at which a warrant, an option, or a convertible security may be used to acquire shares of common stock. every five years in the protected value used to calculate the size of the withdrawals. Then came a one-year step-up and a spousal-continuation benefit. "Companies see something done, figure out how to do it themselves, and quickly follow suit," said O'Connor. "It's all being done to appeal to the $10-trillion bucket A reserved amount of memory that holds a single item or multiple items of data. Bucket is somewhat synonymous to "buffer," although buffers are usually memory locations for incoming data records, while buckets tend to be smaller holding areas for calculations. See hash table, buffer and variable. of baby-boomer money coming down the line. ... The ball they [companies] have their eye on is that they want to play in the retirement-income space and be considered a premier provider of products that generate income." Buying for the First Time Why aren't there more first-time buyers of variable annuities? A 35-year-old, for example, might have second thoughts about committing much to a product that ties up money until age 59 1/2 with a 10% federal tax penalty. And there are better savings vehicles available: 401(k) and 403(b) plans can be funded with pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern earnings and might offer an employer match. Roth IRAs Roth IRA An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first offer future tax-free withdrawals. Beyond those reasons are factors that are less clear, including how much money is involved in those variable-annuity transactions that are subtracted from total sales to derive net flows. NAVA/Morningstar is not allowed to separately track surrenders, withdrawals, benefit payments and replacements because trade associations are subject to strict antitrust Antitrust The antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade. rules, said DeGeorge. Since members must compete with each other, antitrust counsel allows compilation Compiling a program. See compiler. of only the aggregate totals, he said. Because they are not tracked separately, O'Connor said, he doesn't have a window into how the conversation is taking place between adviser and client, and how the product is rejected, versus how often the conversation is never taking place. "Intuitively. I think one of the key issues is adviser acceptance and adoption of the product as something in their arsenal that they will recommend time and time again," he said. Rollovers in the Future? The industry believes the big opportunity will be to capture rollovers from qualified plans into individual retirement accounts to create income streams either through annuitization Annuitization The process of converting an annuity investment into a series of periodic income payments. Annuities may be annuitized regularly, over a long or short time period, or in some cases, in one single payment. or guaranteed withdrawals for life, 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. both DeGeorge and O'Connor. DeGeorge said for the first 20 or 30 years of the products, people bought them as long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. tax-deferred savings vehicles. Those advantages aren't as favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. today due to lower capital gains tax rates. "So in light of that, and in light of the aging of the population, and because people are getting close to retirement age and they have to think not about how much they're going to save, but how they are going to make what they have saved last the rest of their lives, the industry has, to a large extent, been turning its focus to the income side." Throw in the effects of the 2000-2003 bear market, in which investors lost up to 80% of asset values in aggressive subaccounts, and the living-benefit features look even more attractive. O'Connor also noted there has been a huge uptick Uptick A transaction occurring at price above its previous transaction. In order for an uptick to occur, a transaction price must be followed by an increased transaction price. in efforts by insurers to get out their messages by advertising in the popular media. "We are at the front edge of variable annuities being looked at differently than in the past," he said. "Time will tell, but it appears we're moving into a period when it might be more common for an investor to actually inquire in·quire also en·quire v. in·quired, in·quir·ing, in·quires v.intr. 1. To seek information by asking a question: inquired about prices. 2. with an adviser about a variable annuity, something like, 'I've heard a lot about these, but I've also heard a lot of negative stuff. Is there any reason I'd want to look at one?'" The statistical evidence is that this is not yet happening. "Had net flows gone up tremendously in 2006, my interpretation would have been that boomers are really getting the message," said O'Connor. "That may be what we see in the next few years. We don't see tons of rollover A graphic element in an application or on a Web page that changes its color or shape when the pointer is moved (rolled) over it. See JavaScript rollover. See also n-key rollover. money going into variable annuities yet, but I think we will. And we'll start to see those net-flow numbers increase dramatically over the next few years." Key Points * The policy replacements that constitute most of the sales in the variable-annuity industry, if done for suitable reasons, are beneficial to customers, advisers and product manufacturers. * Competitive product development has generated living benefits, which are the reason for many replacements. * Low-cost annuities also are suitable replacements and can attract first-time buyers. How a Variable Annuity Works In its accumulation phase, a deferred variable annuity offers tax deferral tax deferral The delay of a tax liability until a future date. For example, an IRA may result in a tax deferral on the amount contributed to the IRA and on any income earned on funds in the IRA until withdrawals are made. and investment options across many asset classes. In its optional distribution phase, it offers lifelong income as a: * fixed amount; * a changing amount based on underlying performance of chosen investment options; or * a combination of the two. A variable annuity protects against annual income taxation and low investment returns. Source: Best's Review The Guide to Understanding Financial Protection Products Reasons for Exchanging a Variable Annuity * Investor is in his or her late 50s or 60s, may be retired or working less, wants to keep assets invested in variable accounts but is very concerned about market losses. The investor's current variable annuity does not offer guaranteed minimum income Guaranteed minimum income is a proposed system of income redistribution that would provide eligible citizens with a certain sum of money (independent of whether they work or not), also known as "Basic Income Guarantee (BIG)", "universal basic income", "citizen's income scheme", benefits or minimum withdrawal benefits. A switch to a new variable annuity offers those features along with periodic step-ups in the protected values if the markets perform well. The old product no longer carries a surrender charge Surrender Charge A fee levied on a life insurance policyholder upon cancellation of his or her life insurance policy. The fee is used to cover the costs of keeping the insurance policy on the insurance provider's books. , or has only a small one. "You can make a strong argument that that exchange benefits the investor," said Frank O'Connor, manager of Variable Annuity Research and Data Service products at Morningstar. * Investor has owned a variable annuity for many years. Its account value far exceeds the death benefit. There is no step-up to the death benefit, or it is years away. Investor can bring the death benefit up to the account value by replacing the old policy with a new policy. The new policy also may offer periodic step-up provisions in the death benefit. The investor might even be happy to pay a surrender charge to lock in a new, higher death benefit, O'Connor pointed out. * Investor's health circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or have changed. Investor no longer values either living benefits or a death benefit. Investor can exchange into a low-cost variable annuity, reducing annual charges by 1% or more of asset values. Learn More Axa-Equitable Life Insurance Co. A.M. Best No.: 06341 Distribution: Career agents, wirehouses, banks, broker/dealers, 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. Jackson National Life Jackson National Life Insurance is a U.S. life assurance company that is a subsidiary of the UK based insurer, Prudential Plc. Founded in 1961, Jackson is headquartered in Lansing, Michigan, and has over a thousand employees in the region. Insurance Co. A.M. Best No.: 06596 Distribution: Independent agents, brokers and banks Jefferson National Life Insurance Co. A.M. Best No.: 06475 Distribution: Broker/dealers, fee-based advisers, direct-marketing partners For ratings and other financial strength information about these companies, visit www.ambest.com Growing Variable Annuity Net Flows Axa-Equitable: Calling on Financial Planners Two years ago, Axa-Equitable Life Insurance Co. did not have wholesalers that specifically called upon financial planners. Now that is changing as part of a drive to bring more new money into its variable annuity business. With a strong wholesaling presence among wirehouses, regional broker-dealers, career agents and banks, the insurer An individual or company who, through a contractual agreement, undertakes to compensate specified losses, liability, or damages incurred by another individual. An insurer is frequently an insurance company and is also known as an underwriter. was already a major force in VA sales and net flows. In 2006, its net flows hit $6.5 billion, about 45% of its total sales, according to Bill Miller, executive vice president and chief sales officer. That compared to about 20% for the total industry, according to Variable Annuity Research and Data Service at Morningstar. Miller said that at the outset of the financial-planning initiative, Axa ranked third in VA market share in the wirehouse channel, third in the bank channel and second in the career-agency channel, but wasn't in the top 15 in financial-planner share. "So it was obvious that if we wanted to grow our business in general, increase sales and net flows, that was an area we'd circle twice and star," he said. Today the company has 43 wholesalers in the financial-planning channel, he said. Along with the new wholesalers, Axa has dedicated a national sales manager sales manager n → gerente m/f de ventas sales manager n → directeur commercial sales manager sale n → and four division sales managers, created a national account department focused on the new channel, and beefed up support for the other channels. The different conversation, according to Miller, "says 'I can be a helpful solution provider if you have clients with these needs,' as opposed to, 'I have a product that I want you to look at and sell.'" Miller said there are four main reasons for Axa's strength in the VA market: scale and financial strength; expertise developed over a long history; strong execution in supporting wholesalers and financial advisers; and better education. Axa created the first living benefit in 1996 with the introduction of its 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. VA. Growing Variable Annuity Net Flows Jefferson National: Low-Cost Replacements There are still variable annuities to be sold--however, not for living benefits, but for low-cost tax-deferred asset accumulation. They are available through mutual fund companies Vanguard Vanguard Any of three unmanned U.S. experimental satellites. Vanguard I (1958), the second U.S. satellite placed in orbit around Earth (after Explorer 1), was a tiny 3.25-lb (1.47-kg) sphere with two radio transmitters. and Fidelity, and through Ameritas Life Insurance Co., but Jefferson National Life Insurance Co. has the only one with a fixed charge rather than an asset-based charge. The company charges $20 a month regardless of account value, instead of a mortality-and-expense fee. Jefferson launched the VA product Monument Anything by which the memory of a person, thing, idea, art, science or event is preserved or perpetuated. A tomb where a dead body has been deposited. In real-property Advisor in 2005 and has about $200 million of 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. . Lawrence Greenberg, chief executive officer, estimates there are a trillion One thousand times one billion, which is 1, followed by 12 zeros, or 10 to the 12th power. See space/time. (mathematics) trillion - In Britain, France, and Germany, 10^18 or a million cubed. In the USA and Canada, 10^12. dollars worth of unmanaged variable annuities in the United States--policies sold for the sake of the up-front commission and then left to sit unattended by any financial professional and not well-understood by owners. "These policyholders could clearly benefit from asset management, and that is the discussion we have with registered investment advisers and other fee-based planners," Greenberg said. Fee-based advisers don't want a commission, but they want to grow the assets they're managing, so the Monument Advisor product is a good fit, said Greenberg. More companies are expanding their fee-based business, including many large brokerage houses, and the business is more stable long-term, he said. "The trend is in our direction, and it's a large market," he said. "If we were to have just a small piece, it's still a huge flow every year." The average variable annuity charges 135 or 140 basis points annually for mortality-and-expense risk. Jefferson's annual fee would be 12 basis points on its average policy size of about $200,000. Monument Advisor offers 170 investment options and continually con·tin·u·al adj. 1. Recurring regularly or frequently: the continual need to pay the mortgage. 2. tries to add to that total, Greenberg said. Aaron Grey, a registered investment adviser in Denver, said all but two of his 200 clients held unmanaged and more-expensive variable annuities. His clientele averages 50 years of age with a total net worth of $1 million. "I'm not convinced the financial industry does a good job explaining what a variable annuity is and why somebody might want to invest in it," he said. Among them were owners whose advisers put a variable annuity inside an 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. . In those instances, Grey said, he often sells the 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. in favor of upon the side of; favorable to; for the advantage of. See also: favor lower-cost alternatives. He replaces many annuities outside of qualified accounts with the Monument Advisor to save on fees, for the investment options, and because of the technology and customer service. Grey is a good example of how Jefferson National penetrates the fee-based adviser marketplace. "Our theory has always been that you introduce an adviser through a 1035 exchange,' he said. "But then they get comfortable with the product and realize that tax deferral will benefit the client in the long run. The flow of sales is now 20% new money." Greenberg does not feel disadvantaged This article or section may contain original research or unverified claims. Please help Wikipedia by adding references. See the for details. This article has been tagged since September 2007. by selling a product without living benefits. "Accumulation is still a big issue in this country," he said. "Everybody's focused on retirement, but most people are still in the accumulation phase." Growing Variable Annuity Net Flows Jackson National: Adviser-Focused Like Axa-Equitable, Jackson National Life Insurance Co. ranks high in net flows and works hard to educate its wholesalers. Its Perspective II variable annuity ranked second-best in 2005 in terms of net flows, according to Morningstar/VARDS. Jackson has about 110 wholesalers registered to market to individual advisers, regional broker-dealers and financial institutions, said Steve Kluever, senior vice president of product and investment management, Jackson National Life Distributors. Kluever said Jackson's sales success starts with a product that offers advisers and clients a menu of optional benefits, but builds upon its wholesalers' value-added approach and their work with representatives on how to grow their businesses. "Our belief is that if we help them grow their business, we'll get a fair share of it," he said. "They're either finding new money or selling a VA in place of an alternative investment they've used in the past, because they see the value in it for their clients. The wholesalers are helping them to do that. "If you look at net flows, the industry has been hampered a little by the negative stigma stigma: see pistil. Stigma mark of Cain God’s mark on Cain, a sign of his shame for fratricide. [O. T.: Genesis 4:15] scarlet letter of annuities in general," Kluever added. The industry has been suffering, Kluever said, "but the opportunity that lies ahead is very significant for us as an industry." "One of the things we've been very successful with is getting reps to embrace and become comfortable with the whole retirement market and the need for more guaranteed retirement income. As boomers march toward retirement, the need for income comes through loud and clear."
Variable Annuity Total Sales by Distribution Channel
($ Billions)
Banks/
Captive Independent Credit New York
Year Agents NASD Firms Unions Wirehouses
1997 $37.4 $15.4 $9.0 $9.6
1998 42.5 17.2 10.4 10.8
1999 45.9 29.6 13.6 14.2
2000 48.8 36.5 16.2 16.0
2001 40.7 27.8 11.9 15.0
2002 41.3 29.0 12.8 15.1
2003 42.6 36.1 17.2 15.9
2004 44.4 39.5 17.4 13.9
2005 46.8 41.0 17.4 13.9
Regional
Investment Direct
Year Firms Response Total
1997 $14.6 $2.2 $88.2
1998 16.4 2.5 99.8
1999 16.5 3.2 123.0
2000 16.5 3.3 137.3
2001 15.4 2.5 113.3
2002 15.3 1.5 115.0
2003 13.5 1.1 126.4
2004 13.4 1.1 129.7
2005 13.0 1.3 133.4
Source: NAVA and Morningstar, Inc.
Variable Annuity Total Sales and Net Sales
($ Billions)
Total Sales 113.3 115.0 126.4 129.7 133.4 157.3
Net Sales 30.0 30.7 46.0 40.2 20.4 29.8
Net Flow 26.5 26.7 36.4 30.9 15.3 18.9
Percentage
Source: 2006 NAVA Annuity Factbook
Note: Table made from bar graph.
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