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How insurers are losing when it comes
to variable annuities Tight restrictions are placed on investment options in VAs with guaranteed income to reduce their risk. Returns have lagged as a result, frustrating advisers and investors.
By Greg Iacurci
Variable annuity sales have been on a
steady decline the last several years, with market volatility, growing popularity of indexed annuities and a looming Labor Department regulation being primary contributors. But insurance companies have also shot themselves in the foot by severely limiting investment choice on annuity products bought with income guarantees following the financial crisis. These restrictions which come via mandated use of managed-volatility funds or conservative asset allocations in VA products have watered down investment returns, angering consumers and advisers alike as the products have lagged the broader stock market. the advisers and investors using variable Theres no benefit in having more fixed- The frustration with investors is that annuities (rather than more conservative income exposure in a VA with living-benefit theyre in these 60-40 [stock-to-bond] annuities) to maximize returns and generate exposure, he said. blend and managed-volatility allocations, the most guaranteed income, according to Although insurers imposed few and those are underperforming the S&P insurance experts. investment restrictions prior to 2008, 500 because theyre less exposed to equity, Reps Ive talked to want to go as fast contract limitations became more prominent said Gregory Olsen, partner at Lenox as they can inside a variable annuity, said following the financial crisis as companies Advisors Inc. Kevin Loffredi, senior product manager of sought ways to mitigate their risk. When factoring in product fees, annuity solutions at Morningstar Inc. Due to the way VAs with lifetime-income performance has been kind of blah, he Because VAs with a lifetime-income guarantees are structured, while investors said. feature provide downside protection in the account balances dropped precipitously Taken together, the restrictions represent form of a guaranteed income floor, many during the downturn, there wasnt a a sort of disconnect between insurers, advisers prefer investing with aggressive corresponding drop in the promised who are trying to mitigate their risk, and equity allocations, Mr. Loffredi said. benefits. That left insurers exposed to a
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August 30, 2016
gigantic liability they never expected to
happen, according to Scott Stolz, senior vice president of Private Client Group investment products at Raymond James & Associates Inc. However, investment limitations are meant to create more stable account values and lower risk when offering guaranteed lifetime income benefits. Now, nearly all of the top variable annuity living benefit writers require such account-value risk mitigation strategies, according to an Insured Retirement Institute report from December. According to Alison Reed, executive vice president of operations for Jackson National Life Distributors, the biggest change post- cash, Mr. Loffredi said. Although its not the only factor, crisis was the introduction of managed- According to IRI, whereas large-cap investment restrictions factor tremendously volatility funds. blend funds benchmarked against the S&P into these declines, Mr. Stolz said. And hes The funds aim to buffer investors from big 500 once held the lions share of assets, not alone in believing that. market swings, protecting on the downside money has moved dramatically toward Mr. Loffredi points to VA sales of Jackson but, consequently, not capturing as much more conservative funds. Over 2005-15, National, which doesnt impose any fund upside. conservative allocation funds gained restrictions, as evidence of adviser and While the S&P 500 returned 1.4%, 13.5% about 7 percentage points in market share investor preference for open-architecture and 32.2% in 2015, 2014 and 2013, respec- and moderate funds about 10 points, VA platforms. Jackson, the No. 1 VA seller, tively, asset-weighted average net returns in according to the IRI report. Large-caps lost is the only one among the major insurers managed-volatility VA sub-accounts lagged, at about 15 points. that doesnt impose some sort of investment a respective -3.5%, 3.5% and 15.3%, according Some insurers take an even more restriction, he said. to Morningstar. regimented approach by dictating that Over 2006-15, Jackson saw net annual sales The number of managed-volatility sub- particular percentages of an equity bucket increase a whopping 225%, to $23.1 billion accounts, which are like mutual funds inside can go to small-cap funds, large-cap funds, from $7.1 billion, according to Morningstar. VAs, is up 240% since 2006, to more than etc., Mr. Loffredi said. Among the top 10 VA sellers last year, 7,100 from approximately 2,100, according Such restrictions kind of defeat the goal about half posted gains in new annual sales to Morningstar. of having a variable annuity, according to over the same period. In percentage terms, Assets in VA managed-volatility portfolios Mr. Stolz of Raymond James, which has the closest to Jackson was Transamerica, increased markedly over that period, about 6,700 advisers. which posted a 114% increase to $7.9 ballooning to $133.2 billion through June Its like getting double insurance, Mr. billion in sales, a third of Jacksons total. from $25.1 billion as of year-end 2006, Stolz said. Ive been telling our advisers for Jackson is one of the main carriers Mr. according to Morningstar. four years now, if youre going to buy a VA Olsen of Lenox Advisors uses with clients Such funds now capture more than half with a living benefit you have to invest the seeking VAs with guaranteed income riders, of net positive cash flow, and use of these money as aggressively as the contract allows due to its lack of restrictions (as well as its strategies is unlikely to abate, IRI says. and the client is comfortable with. strong credit rating), he said. Insurers also have required more Of course, advisers and clients may have conservative allocations when coupling a VA DECLINE goals other than boosting investment return, VA with a living-benefit rider. For example, Industrywide variable annuity sales have such as maximizing guaranteed income rather than allow investors to put 100% into been on a multi-year decline. New VA sales from day one. In that case, other insurance equities, many firms may put guard rails decreased each year of 2011-15, going from companies and potentially other annuity on asset allocation by allowing up to 60% nearly $158 billion in 2011 to $133 billion products may be the answer, advisers said. in equities, with the rest in fixed income or last year. The Publishers sale of this reprint does not constitute or imply any endorsement or sponsorship of any product, service or organization. Crain Communications 732.723.0569. DO NOT EDIT OR ALTER REPRINTS. REPRODUCTIONS ARE NOT PERMITTED. #2981
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The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses, which are contained in the same document, provide this and other important information. Please contact your Internal Wholesaler to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money. Variable annuities are long-term, tax-deferred investments designed for retirement, involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. Guarantees are backed by the claims-paying ability of Jackson National Life Insurance Company (Home office: Lansing, Michigan), and Jackson National Life Insurance Company of New York (Home office: Purchase, New York) and do not apply to the investment performance of the separate account or its underlying investments. Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York). Variable annuities are distributed by Jackson National Life Distributors LLC, member FINRA. May not be available in all states and state variations may apply. These products have limitations and restrictions. Contact Jackson for more information. Standard & Poor's is not affiliated with Jackson National Life Distributors LLC. S&P, S&P 500 and Standard & Poor's are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by Jackson National Life Insurance Company. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of purchasing the product. The S&P 500 Index is unmanaged and not available for direct investment. Index performance does not include the reinvestment of dividends. The S&P 500 Index is a market capitalization-weighted index of 500 stocks that are selected by Standard & Poors to represent a broad array of large companies in leading industries. The S&P 500 Index is unmanaged and not available for direct investment. The payment of dividends is not reflected in the index return. Jackson is the marketing name for Jackson National Life Insurance Company and Jackson National Life Insurance Company of New York. Jackson National Life Distributors LLC. For representative use only. Not for public distribution.
