Changing Season for Variable Annuities

The annuity market is in a tough spot with variable annuities right now.  They are still good products and offer many investors benefits they can’t get anywhere else, but low interest rates have made it hard for insurance companies to keep up the guarantees.  The living benefits have put a strain on insurance companies, so we should all be prepared for upcoming changes.  While they will  make an already complex product even more complex in some cases, changes will help the variable annuity industry survive and even thrive.  Darla Mercado of Investment News offers up “8 notable trends in the VA business” to look for this year.

You will see more advisory share classes than ever before.  These products will be low cost so that advisors can add on their fee.  Nationwide is one of the latest to introduce an advisory share product with their Destination Income variable annuity.  We’ve already seen an increase from 34 product offerings to 63 since just last year.  Another continuing trend in the variable annuity market will be cash offerings for selling old products.  AXA, Transamerica, and The Hartford are just three of the insurance companies offering clients an increased account value if they sell their variable annuity with living benefits back to the insurer.

To help manage living benefit riders, more insurance companies are adding volatility management funds to their variable annuities.  Ohio National Life and Nationwide are two of the most recent companies to offer these funds for their variable annuities.  We’ve written many posts about Sun Life selling its variable annuity business to private equity firm Delaware Life, a subsidiary of Guggenheim Partners.  This selling off of older variable annuity business to private equity firms is very likely to continue.  It shows a bright future for the industry that there are firms willing to buy the variable annuity business, most recently Berkshire Hathaway Life purchasing Cigna’s business.

Jackson National is now offering variable annuities that are more investment focused and do not offer lifetime income benefits.  There will probably be a lot more of these products introduced in the VA market that eliminate these living benefits to help insurers avoid large increases in their long-term liabilities.  I’m certain that investors won’t like this next trend, but you probably aren’t surprised that fees are likely to increase on variable annuities.  Although AIG’s VALIC did drop some fees on their products, most insurers will probably be increasing variable annuity fees this year.

There is a good chance that some other companies will follow MetLife’s decrease to a 4% guaranteed minimum income benefit.  A yearly 4% increase in the benefit base and 4% withdrawals are not really a bad deal in today’s economic environment, despite the fact that they are less than previous offerings.  Finally, there is quite an increase in the number of hybrid investments in the market.  By combining structured products and variable annuities, clients’ money is protected if markets take a dive while they still have access to increases in the market.  AXA, MetLife, and Allianz Life are all offering these hybrid annuities already.

Although we are approaching the 2nd quarter of the year, we are still monitoring early trends and making educated guesses about what will happen the rest of this year.  Stayed tuned to Annuity FYI to see where this all takes us in 2013.

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