The Story Behind Q3 Variable Annuity Sales

Over the last few years, variable annuities have earned quite a bad reputation, and it wasn’t without cause. Sold with (often) hefty commissions attached, these complex products were pushed on everyone, even those who wouldn’t benefit from their offerings. Subsequently, sales of VAs have continuously dropped, until now. For the first time in a long time, a few insurers were able to brag about their third-quarter earnings in the variable annuity sector.

While some insurers were glad to see the closing of their variable annuity business this year, others welcomed earnings contributions. For example, executives at Prudential Financial Inc., claimed that a 4% increase in variable annuity average separate account values helped increase revenue from policy charges and fee income.  And Lincoln Financial reported its variable annuity sales up 1% (to $1.53 billion) from the third quarter of 2016, which happened to be the first time VA sales increased at Lincoln since 2014. Why the new numbers you ask? According to a recent ThinkAdvisor article, here’s a look at what potentially caused the turnaround.

Insurers know more about how to manage variable annuity risk.

Many life insurers hold quarterly calls with securities analysts to discuss earnings reports. Executives are now giving very detailed descriptions of how they know the amount of capital they will need to guarantee that annuities will meet benefit obligations under 95% of anticipated scenarios. For example, executives at Brighthouse Financial Inc., talked about needing to increase variable annuity assets by $700 million to meet actuarial targets. Securities analysts seem to really like that these executives could fully explain the assumptions behind the increase.

Insurers have figured out how to design and sell VA contracts without difficult-to-support benefits guarantees.

Lincoln Financial’s president, Dennis Glass, noted that his company’s increase in VA sales was partly because of a 23% increase in sales of VA contracts with no living benefits.

“The value propositions for tax deferral and legacy planning continue to resonate with consumers,” Glass said during his company’s earnings call.

Stock prices are high.

Even if an insurer’s current variable annuity sales are low, or worse yet, non-existent, high stock prices can increase the value of the assets held in the contract holders’ separate accounts, therefore increasing revenue from asset-based fees.

Most issuers are still being safety-conscious.

A security analyst asked Mr. Glass about the possibility of a new VA feature “arms race” breaking out.

“My answer on that is no,” Glass said. “I don’t see us, the industry, getting back into an arms race. I think it’s a reasonable market in terms of pricing right now.”

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