2nd Quarter Variable Annuity Sales Rose 5.8% Over 1st Quarter

A relatively new living benefit, the hybrid type, is elected as a single rider, but the investor may have the option to either create an annuity income by exercising the benefit as a GMIB, or create income using guaranteed withdrawals, or simply access a guaranteed value after a declared waiting period.

The Guaranteed Minimum Withdrawal Benefit, in particular, seems to be evolving into various distinct benefit types as companies look for ways to distinguish their offerings in the marketplace. The "For Life" feature, which guarantees a fixed withdrawal amount for life regardless of actual account value, has been available from a few companies for some time but is becoming more common. Other distinctive designs include a tiered bonus arrangement, where the guaranteed withdrawal base increases the longer one waits to exercise the benefit, and combination death/living benefits, where one guaranteed benefit base is created that either can be exercised as a living benefit or is paid out as a guaranteed death benefit amount.

Rather than the migration toward unbundled products forecast several years ago, when many predicted that the most successful products would be those that allowed the investor to select from a large menu of independent options, variable annuity product design today may be moving toward unified benefit structures that limit the number of elected options but provide the flexibility to exercise the benefit in different ways depending on changing needs that cannot be predicted years in advance.

For instance, while a GMIB can be suitable for someone in excellent health on the purchase date of the annuity, exercising the benefit to create an annuity stream of income may not be optimal 10 years later if a serious or terminal illness has developed; having the option to access the guaranteed benefit base without annuitizing increases the potential value of the benefit. Hybrid benefit structures may also benefit both the insurer and the consumer in other ways, as in the case of a combination living and death benefit–one cannot exercise both but may need either, so the cost of the hybrid may be lower than the cost to elect each independently, reflecting the reduced risk to the insurer.

Assets under management in variable annuities reached $1.134 trillion as of 6/30/05, a 2.9% gain over 3/31/05 assets of $1.102 trillion.

Of the Top 25 companies, the five largest percentage asset gains were achieved by Allianz, with an 11.4% increase; Jackson National, 11%; Pacific Life, 7.2%; Lincoln National, 3.5%; and AXA Financial, 2.5%.

The pie chart of allocated assets accompanying this article has been re-formatted for 2nd quarter 2005. The VARDS product line was acquired by Morningstar, Inc. on Jan. 1, 2005. The classification of variable annuity subaccounts in the VARDS database has been changed from an Investment Objective methodology to the Morningstar Investment Categories and Asset Classes. As there are 64 Investment Categories, far too many for a high level pie chart, modified asset classes focusing on market capitalization and other subaccount groupings, such as "Specialty" for REIT, natural resources, technology, etc., are used for clarity and brevity.

Finally, net cash flow, which has been on the decline this year, was $5.2 billion in the 2nd quarter, bringing year-to-date total net flow to $10 billion, or 15.5% of new sales, in contrast to 2004 net cash flow of $40.2 billion, or 31.3% of new sales.

Frank O'Connor is product manager, VARDS products, at Morningstar, Inc. He can be reached at [email protected].