A,B,C, and L-Shares: VAs Respond To Competition
Variable annuity gross sales have seen some rocky times of late, slipping 16% to $114 billion in 2001 from an all-time high of $137 billion in 2000.
VA sales through the 2nd quarter 2002 have stabilized somewhat compared to last year, reaching just over $57 billion. Volatility and the sustained market downturn have contributed most to declining sales.
Partly in response, but also in an effort to keep afloat in the competitive variable market, many VA manufacturers have continued to broaden their portfolio, targeting various types of distributors and consumers. Theyve also begun to offer new or revamped guarantees.
Well look at some of these changes here. The companies offering the newer designs are clearly trying to position their products to compete in todays more difficult equity marketplace.
The typical six-year to eight-year back-end load, heaped commission scale variable annuity–often referred to as the B-share VA–has long been the staple of the industry. Even today, the B-share VA remains the predominant product for many career agent companies.
But as VA sales through independent investment-oriented producers have continued to increase, manufacturers have experimented with alternate product structures. These structures vary in whether and to what extent they charge back-end loads, and in the level compensation they pay to the sales representative.
For instance, some companies have started introducing A-share, C-share and L-share variable annuity products. The table summarizes the back-end load and compensation structures for these various product forms. The products borrow their "share" names and design from mutual funds.
As you can see, the A-share products typically have a front load instead of a back load and they have a compensation structure similar to that of traditional B-share products. C-share VAs have no back-end loads, but they offer levelized comp schedules. The L-share VAs have fairly short back-end loads and smaller heaped commissions plus a significant trailer.
For product asset charges on the various product forms, companies appear to take one of two approaches:
1) Charge the same level of asset-based charges among all product types, and differentiate the various forms with higher minimum sizes and/or stripped-down product features.
2) Charge higher asset-based charges with increasing liquidity. These charges perhaps might go as much as 30 basis points higher than those in a B-share VA product.
The second approach appears to be the most prevalent. However, this approach can lead to fairly high fees when the customer elects to include other menu add-ons, such as guaranteed minimum death benefits or other guaranteed living benefits.
Based on new product introductions that have been coming out recently, the L-share variable annuity appears to be the most popular of the new alternate product structures.
L-shares may appeal to consumers who want to switch to a new VA to get access to its additional fund choices or newer product features but who do not wish to restart another 7-year surrender charge.
C-shares are the next most popular.
