Variable annuity carriers submitted 182 filings to the Securities and Exchange Commission (SEC) in second quarter 2013. This single number points to a new chapter in the continuing mystery about the future of the variable annuity business.
The 182 changes represent the highest number of changes over the past eight quarters, according to Morningstar.
The only other quarter (in the past eight) that comes close was second quarter 2012, when there were 168 changes, said Morningstar, which began tracking variable annuity product changes in third quarter 2011.
Does the 2013 number portend more tumult in the variable annuity industry or a settling in of a new variable annuity order? Some advisors are likely wondering that, since the last time product changes mushroomed, in second quarter 2012, many variable annuity carriers were dealing with economic pressures by sharply curtailing product benefits and options, even availability. That meant advisors had to scramble to find new products, even new carriers, to meet client needs. It is not a period that most advisors want to repeat.
A new and different time
John McCarthy, product manager for advisor software at Morningstar, thinks this year is, and will be, different. One reason is that a lot of the changes filed in second quarter are of a housekeeping variety.
There were some new product filings and some new benefit filings, he allowed, but most of the other changes were “low impact.” The most common filings entailed consolidation of age bands on the lifetime withdrawal benefits, he said, although there also was some de-risking activity such as the previously announced living benefit buyback offer by AXA.
One carrier — Transamerica — accounted for 57 of the 182 changes, or nearly one third (31 percent) of the total (see table.) But many, if not most, of the changes this carrier made were in the housekeeping category, McCarthy noted. The filings included a new series of death benefits, updated investment options, and elimination of the initial payment guarantee and the fixed life annuitization option. “The living benefits remain the same,” he pointed out.
Among the 57 changes were 39 updates and re-issues of new variable annuity contracts, including changes to New York versions of products.
The closest contender was Hartford, which made 22 changes in the quarter, but all were related to contract closures stemming from the carrier’s well-publicized pull-back from the variable annuity market. These changes represent nearly 12 percent of the 182 filings for the period.
McCarthy’s view is that the continued low interest rate environment kept pressure on carriers and hampered their ability to ratchet benefit levels back up to previous levels.
What might be ahead?
Will that situation change now that this year’s interest rate increases seem to be holding? (On Sept. 10, the 10-year Treasury yield was at nearly 3 percent — up from about 1.7 percent a year ago.)
The industry probably won’t see carrier response to this rate environment until third or fourth quarter, McCarthy predicted. “If carriers do start filing changes due to the new rates, these will likely be gradual shifts, with some carriers taking a wait-and-see approach.”
Advisors might gain some insight to what is coming, however, by following how big carriers respond to the changing environment.
For example, in May 2012, MetLife had made a public announcement that, due to low interest rate pressures, it would be scaling back on its variable annuity writings. The company did exactly that. MetLife’s new variable annuity sales dropped by 21 percent over first quarter, for instance, according to Morningstar’s second quarter sales report.
Prudential’s new variable annuity sales dropped even more, by 42 percent, in second quarter compared to first.
Those downshifts put MetLife and Prudential in fifth and sixth place, respectively, in terms of new variable annuity sales in second quarter. That’s down from third and first place, respectively, in Morningstar’s second quarter 2012 report.
The question for advisors is, do these sales declines signal a temporary shift for the companies, after which they will rebuild sales if interest rates continue to improve? Or does it reflect a long-lasting strategic direction? Finally, will the rest of the variable annuity industry follow suit? The answers could help advisors make decisions on positioning, or repositioning, certain client account assets and products.
According to McCarthy, the numbers and types of product filings the companies make in the coming months can provide a good indication of the carrier — and industry — direction.
For instance, if carriers start filing product enhancements, that could be a signal they are once again angling to write more business.
The three areas to look for in this regard are, according to McCarthy, filings for increased withdrawal percentages, lower fees, or increased step-up percentages. Those are the areas where carriers have, in the past, made enhancements in order to spur sales.
To ramp up from a pull-back, carriers also will need to have the sales force and distribution relationships in place to accommodate more flow. For large and jumbo carriers, that would not be especially difficult, but for mid-sized to smaller carriers that also have retrenched, it could be a challenge, he said.
The industry is not without resources, however. Or appetite. For instance, in the second quarter, total variable annuity new sales rose by 7.7 percent compared to first quarter, according to Morningstar. This was despite the dramatic declines at MetLife and Prudential.
In fact, second quarter sales of $36.9 billion were only slightly lower than the same period last year, when new sales hit $37.7 billion.
“This means that the other industry players picked up the slack from the second quarter declines at MetLife and Prudential,” McCarthy said.
Two large players in particular — SunAmerica/VALIC and Lincoln Financial Group — increased their new sales by 37 percent and 30 percent, respectively. In the process, Lincoln moved into second place from fifth in the Morningstar rankings, and SunAmerica moved into fourth place from sixth. (See table.)
“You rarely see changes that dramatic in one quarter,” McCarthy commented.
In terms of industry trends, second quarter is the time of year when many carriers introduce variable annuity changes. That is because variable annuity insurers are required to file prospectus updates with the SEC by May 1 of each year. Many carriers do file changes throughout the year as well, but the biggest bump in filings always comes just before the May 1 deadline. As indicated above, it’s the type of filings that advisors need to follow in order to get a sense of industry direction.
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