June 17, 2013 INN Exclusives

VA Products: Reading The Signals

InsuranceNewsNet

The variable annuity sector saw 97 annuity product changes in first quarter 2013, according to new figures from Morningstar.

That compares to just 59 in first quarter last year, and 101 in fourth quarter 2012.

Writing in the Morningstar’s most recent product activity report, John McCarthy described the first quarter 2013 activity as “robust.” McCarthy is product manager-annuity solutions for Morningstar.

But what do these figures mean for advisors and annuity professionals who have seen the variable annuity products they work with pulled, downsized, repriced and/or changed over the past year?

New contracts

For one thing, the Morningstar data confirm what many variable annuity specialists already felt: There were just about as many new contracts and benefits released in first quarter 2013 as there were fee changes and product revisions.

Specifically, variable annuity carriers filed 18 new contracts and 21 new benefits in the quarter, making for 39 new product initiatives in all.

That is up from 12 and nine, respectively, making for just 21 new initiatives in first quarter last year. It also is up from four and 12, respectively, making for 16 in all, in fourth quarter 2012. So the new product initiatives have essentially doubled over last year and last quarter.

On existing contracts, variable annuity carriers made 14 fee changes and 18 product revisions, or 33 in all, in first quarter 2013.

That is up from up from five and 20, respectively, or 25 in all, in first quarter last year, and down from 37 and 16, respectively, making for 53 in all, in fourth quarter 2012. So product tweaking and curtailment is continuing, but not as rapidly as a year ago.

Those are database numbers and may seem comparatively small in relation to all the product variations that exist in the industry. But in everyday work-life, those changes can feel like a blizzard of “new” to representatives and advisors who work with variable annuities.

That’s because reps and advisors receive tons of messages, supporting materials and announcements

about each new debut or change, their variants, the competitors’ products and more. Not all reps and advisors see all the changes, but most see several. In a period of just one quarter, that’s a lot.

Still, compared to the periods last year when very few products came out, first quarter 2013 likely represented a somewhat welcome change.

Closures

Not all the changes in first quarter were about new efforts, though. For instance, carriers closed 25 contracts during the first quarter 2013, according to Morningstar. That’s up from 21 in first quarter 2012, but down from 32 in fourth quarter 2012.

Messages and announcements accompanied those changes, too, and advisors often found themselves scrambling to find new markets for comparable products or benefits.

Also in first quarter 2013, variable annuity carriers continued to adjust benefit levels down, McCarthy said. And they continued to reduce volatility in their products’ investment subaccounts.

The distribution footprint changed as well, he said. For instance, SunLife sold its U.S. variable annuity business to Delaware Life Holdings, owned by Guggenheim Partners, and Hartford moved to reduce its liability with one of the more impactful buyout offers in recent memory.

To many advisors, this is more of the same—the restrictions of 2012 continuing into this year. But the Morningstar report indicates some signs of new directions, too.

For instance, Forethought Financial entered the variable annuity market for the first time in first quarter 2013. And a few carriers have been innovating. One example is Prudential, which in first quarter 2013 released a unique variable annuity that invests all premiums in a long duration bond portfolio and guarantees the income withdrawal amount will grow every day until lifetime income begins.

A look at sales

So what lies ahead—expansion or more contraction? A look at variable sales results during the same period might provide some clues.

The first quarter product development activity occurred in a time when variable annuity sales results did show a slight improvement. Total sales were $34.6 billion in first quarter this year, up 0.6 percent from $34.4 billion in fourth quarter 2012, Morningstar said.

That’s significant because product development activity and sales are interrelated. In general, carriers do not do much with new product development if they see bad news ahead, and the reverse is also true.

In view of that, the fact that about half of the first quarter 2013 filings (that were not closures) involved new contracts and benefits is probably a somewhat positive sign that things are looking up.

So is the net variable annuity sales figure from Morningstar’s first quarter results. “Net sales” refers to total premium sales minus surrenders, withdrawals, inter- and intra-company exchanges, and benefit payments. Here, again, first quarter numbers were up—to $900 million. This marks a return to positive territory after posting a negative $599 million in the fourth quarter of 2012, Morningstar said.

Another first quarter sales figure suggests a more ominous view, however. This is the Morningstar finding that first quarter total sales were down 4.4 percent compared to the same period last year.

But consider the context. Annuity carriers had a challenging year in 2012 due to market volatility and low interest rates. Some intentionally reined in sales in response. The burden of that carried over into early 2013, so the year-over-year decline in total first quarter sales was not unexpected. But Morningstar has also recorded quarter-over-quarter increases—in sales and in new product activity. This suggests that the tide may be shifting at least toward stability, if not big growth.

Product activity—or lack thereof—is always a signal. It just takes some time to figure out what it is signal of.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].