Despite Slump, A Few Companies Are Bursting with VA Sales

The variable annuities second quarter earnings report inspired dire headlines, but the news is anything but bad for a couple of companies that exploded in sales.

In fact, the results show a deepening divide between gains and losses in the market, according to Morningstar's Variable Annuity Research and Data Service (VARDS) quarterly report. Phoenix led the decliners with an 84 percent drop in sales between the first and second quarters of this year; Ohio National was the top gainer with a 101 percent increase.

The few companies that are growing are advancing so much they were able to pull out a slightly winning quarter with an overall 4.3 percent increase over the previous quarter. But that was after a dismal first quarter that followed four other lackluster quarters.

The second quarter did not look so sterling compared to the previous second quarter, with a 24 percent overall decrease in sales. But even here, the gainers sprinted away from the pack. For example, Prudential, the leader in independent agency sales, grew to $3.4 billion in the second quarter of 2009, up from $2.7 billion in the second quarter of 2008, or about 23 percent. The company did very well over the first quarter, growing $1.2 billion, or about 35 percent.

Bruce Ferris, senior vice president of sales and distribution at Prudential Annuities, said the past year has shown the value of VA’s guaranteed minimums.

“We've come through a hundred-year event in the market due to the volatility and there was no place to hide,” Ferris said. “It showed the value of our products to financial advisors and in turn to their clients and prospects.”

Just as the equity markets’ plummet exhibited the value of the floor provided by VAs with guarantees, recently rising stock prices drove up esteem for the products.

 “There’s a little bit of renewed optimism and confidence that we have shared with some of that upside momentum,” Ferris said. “While I'm not in any way predicting a windfall increase in the industry, I do think that the overall drop-off has leveled off and the industry will see $100 billion in annual VA sales. That’s far off its peak of $155 billion in 2007 and we have a lot of work to do to build the industry back up.”

Prudential and other companies increasing their sales had healthier reserves than other carriers that cut out guarantees and pulled products. The insurers dialing down their VA products tend to be the same that have been drowning in bad investments.

Frank O’Connor, the author of Morningstar’s VARDS report, sees a deepening division between rising and falling companies.

“If you were to look back a decade you would see the top 10 companies had a much smaller percentage of total sales than they would have now,” O’Connor said. “Not only are there fewer companies at the top, what’s really been interesting is the significant shuffle of the companies in that top group.”

Carrier reserve, hedging strategies and perspective are all part of the reason.

 “What we’ve seen is various philosophies emerge, bifurcation if you will, between companies that have just about pulled out and companies like Prudential that have forged ahead with a business-as-usual approach to the VA market,” O’Connor said. “They feel that their guarantee design insulates them well enough against the balance sheet impact of these guarantees both through their benefit design and potentially through the efficacy of their hedging programs so they are comfortable continuing to offer essentially the same guarantees they were offering before there was a significant downturn in equities markets.”

The product design that helped Prudential was its dynamic balancing in some of its VA products, which automatically redistributes money if a fund is performing poorly, O’Connor said. Another factor helping companies that are sticking with their guarantees is the confidence of producers depending on the product at a time when clients are looking for security.

“There’s been a degree of frustration for advisors as companies try to figure this out,” O’Connor said.  “AXA, for example, the roll-up rate on its income benefit went from 6 percent to 5 percent. They're kind of bouncing all over the place, within a single month.”

AXA lost nearly $1 billion in sales over the quarter, dropping from $2.9 billion in the first quarter to $1.8 billion in the second.

Producers perpetuate the sales slowdown because they place less with those companies. But other companies are losing business in the short term because they are introducing new products – some with a potentially bright future.

“John Hancock is one of the companies going down the road that simpler is better,” O’Connor said. “They’ve come out with an AnnuityNote product that is a single investment option VA with the guarantee imbedded in the core product so it’s not elected as a separate option. It takes away the conversation the advisor has to have about adding on an option and here’s how much it’s going to cost and here’s why we’re doing it. It’s all rolled into one product.”

Whatever the product, O’Connor said he believes more advisors are looking for VAs. He also sees less harsh criticism of VAs.

“Over the past six months, I noticed I don't read so much more about how expensive VAs are,” O’Connor said. “I don't know if I’d classify it as a shift in mindset but I think you have to wonder does an extra 1 percent really sound like a lot in terms of a fee structure when you just saw 40 percent evaporate from your overall portfolio?”