As the nation’s most powerful annuities carriers continue to reduce their exposures to the variable annuity (VA) market, how those annuities are sold is almost as important as tweaking product features: like ratchets, rollups and withdrawal payout rates.
One of the most important lessons learned by companies selling VAs is that it’s better to sell them based on the types of funds that insurance companies make available within the annuity than it is to pitch the guaranteed benefits.
Joel Levine, an analyst with Moody’s Investors Service, said companies also do well when they offer simple, straightforward VA guarantees that neither cost the carrier very much nor entail too much exposure to downside risk.
“For many of the companies, this is where the captive field forces prove to be of great value,” Levine told InsuranceNewsNet.
Sales forces trained to sell in a particular way offer annuity carriers tighter control over their products and, as a result, offer a “tamer product” with more “persistency,” he said.
“If you rely on external distribution, you may have to offer richer benefits to get the attention of a distributor, or pay higher commissions, which will cost more ultimately,” he added.
Carriers with “tied distributors” reduce the underwriters’ exposures to a greater extent and control product sales and performance more precisely, according to Levine.
Selling VAs through a network of captive distributors means financial advisors don’t have to “spreadsheet” the gains and the costs of one VA compared with another, which would happen with independent advisors, he also said.
Northwestern Mutual relies on a captive sales force. Ameriprise Financial, which used to sell VAs through outside financial planner channels, no longer uses outside channels, Levine said.
In addition to tweaking the VA guarantees, insurance carriers have resorted to buying out contract holders or buying back the benefit. Some carriers even have asked contract holders to redirect their investments, according to a Morningstar analysis from last fall.
As strong an argument as there is to be made in favor of a captive distribution channel, there’s a case to be made for independent broker/dealer (IBD) distribution channels because it forces carriers to compete for business, said John
McCarthy, a product manager for insurance solutions with Morningstar in Chicago.
“It’s the competition argument. Competition is good for a lot of people in a lot of ways,” McCarthy said.
Selling VAs through the IBD market may require a carrier to maintain a dozen relationships with IBDs, but the IBD platform is available to a dozen other carriers, so carriers must “sharpen their pencils” to stay competitive, he said.
Carriers want to sell VAs through as many channels as they can: banks, captive agents, independent and regional broker/dealers, wire houses and direct response providers. Many carriers sell huge volume through captive agents and the IBDs.
In the fourth quarter (2013), captive agencies sold 34 percent of all VA sales and IBDs captured 33.4 percent of all VA sales, according to the latest quarterly statistics issued by Morningstar.
MetLife, for example, sold $890.6 million worth of VAs in the fourth quarter through its captive channel and $421.3 million through IBDs.
“As a carrier, I can decide how much I want to sell through whatever channel,” McCarthy said. “So MetLife has a massive internal broker/dealer, but they also have a huge independent broker/dealer system they sell through as well.”
The role of the distribution chain and financial advisors in reducing the risk of VAs is important as recent financial stress tests have found that VA portfolios held by Prudential, Jackson National Life and MetLife remain exposed to “substantial variable annuities-linked risks,” according to Moody’s.
Those three companies are among the largest VA underwriters in the country, and they mainly use non-captive distribution for the sale of variable annuities, Moody’s said.
The Moody’s report said that for in-force business, Prudential and Jackson mostly have exposure to guaranteed minimum withdrawal benefits (GMWBs), while MetLife has exposure to guaranteed minimum income benefits (GMIBs).
GMWBs allow contract holders to periodically withdraw between 5 percent and 7 percent of a prescribed benefits base. GMIBs allow contract holders to annuitize an accumulated account value at a guaranteed rate after a waiting period.
Of the three companies, Jackson, which has increased prices and reduced its living benefits, has the most “aggressive product,” Moody’s said.
Jackson contract holders are authorized to allocate 100 percent of their VA assets to stocks, a volatile asset class. In addition, the lack of restrictions on policyholder investment allocations makes the Jackson VA portfolio more “challenging to hedge,” according to Moody’s.
Jackson is selling “the least de-risked” product, and Moody’s maintains a financial strength rating of A1 on Jackson. Jackson has a total variable annuity account value of $106 billion.
Prudential, which also has a financial strength rating of A-1, reported about $119 billion of VA account values. MetLife, with a higher financial strength rating of Aa3, had total contract account values of $138.6 billion, Moody’s said.
As VA underwriters have spent the past two or three years reducing guarantees and raising rates, the companies depends on hedging to meet the obligations of their in-force blocks of VAs.
New VA sales reached $141.2 billion in 2013, down slightly from $143.3 billion in 2012, Morningstar reported.
Even with slowing sales and lower risk exposures compared with older versions of VAs sold before the financial crisis, “we do not expect the issue of exposure to variable annuities to dissipate as a credit concern any time soon,” Moody’s analysts Scott Robinson and Min Son wrote.
If VA portfolios have raised a few eyebrows among credit analysts, are they still a good deal for retirees and pre-retirees when bank savings accounts are paying next to nothing in interest?
“If you buy an annuity with lifetime benefits but die the next year, it’s not a good deal because you weren’t able to use the product features,” Levine said. “But with regard to a VA with guarantees, the real risk is a huge dive by the market and outliving payments based upon your account value.”
Contracts bought in 2008 with generous guarantees would typically still be in place, he said.