One Product, Two Paths

• Ronald J Panko
• January 2013
• 

These are interesting times for variable annuity writers and the range of benefits they offer. While only a few large companies dominate the business of providing guaranteed lifetime withdrawal benefits or income benefits, other companies are reaching out to independent fee-based advisers with products that are viable in that distribution space.

Robert O'Donnell, president of Prudential Annuities, said now is an exciting time to be in the annuity business, despite the pressure the prolonged low interest-rate environment has been exerting on annuity writers. That's because there is an unprecedented demand for the "core value proposition of our industry and, at the same time, a contraction of supply.

"Basic economic theory tells you that's an environment rich in opportunity, and I expect our industry to fully deliver on that opportunity," he said. "The traditional variable annuity will remain a major solution for the marketplace, and the contingent deferred annuity has the potential to grow as a core sustainable value proposition. But those are only two of many solutions that our industry will deliver to meet and exceed the demands of our market.

"That demand is only going up. I'm confident that the skills and resources of the annuity industry will deliver solutions to meet the retirement income needs of many more Americans," he added.

But while Prudential and other major writers focus on guaranteeing retirement income, Jefferson National Life Insurance Co. and others are focusing on the value of tax deferral and alternative investment options.

"What has differentiated us is that we've built an entire company around serving registered investment advisers and other fee-based advisers," said Laurence Greenberg, president of Jefferson National. "They view traditional variable annuities as expensive vehicles that don't fit their business model. Their clients pay them to manage assets, and they believe they can mitigate the ups and downs of the market."

Like other companies, Prudential has de-risked its guaranteed lifetime withdrawal benefit in its variable annuity, Highest Daily Lifetime Income, to respond to capital market pressures. The annual guaranteed roll-up rate on its benefit base had been 7% in 2009, but it is now 5%.

Other de-risking levers among writers include scaling back the withdrawal rates at a given age, pushing those ages higher, charging more for the living benefits and death benefits, limiting the investment options and allocations on which the protection is available, embedding hedging strategies within investment options and limiting sales. Most insurers have used some combinations of these levers.

Contingent deferred annuities, meanwhile, are relatively new. Prudential, in fact, does not yet offer one, but is exploring this idea. A CDA is essentially a stand-alone GLWB designed for use on independently managed portfolios, not just those within variable annuities, according to a paper by Nancy Bennett, senior life fellow at the American Academy of Actuaries.

O'Donnell said the industry interest in the development of CDAs exists because the industry believes it can use the product to reach many more Americans than it is reaching with current guaranteed lifetime income solutions.

"Prudential believes that one of the reasons for this is the value proposition of the financial adviser," he said. "The adviser is primarily engaged in asset management services for the investor, and generally the insurance industry delivers a fully packaged solution of investment strategies and protection instruments. This causes the advisers to choose between the two. We're developing solutions that allow advisers to reach many more Americans with solutions that effectively manage and protect their assets."

At the Other End

On the opposite end of the spectrum is Jefferson National, which in 2006 introduced its Monument Advisor variable annuity designed specifically for fee-based or fee-only advisers. In 2011, the product had $278 million of premiums, according to A.M. Best Co., but Greenberg said in November it was on track to do about $400 million in premiums for 2012 and expected to exceed $600 million in 2013 and $1 billion thereafter. Those numbers could allow the company to break into the top 20 variable annuity writers within a few years, according to data compiled by research organization Limra.

Monument Advisor charges a flat $20 monthly fee, regardless of account value. It is no-load and has no surrender charges, death benefits or living benefits.

But it offers 390 investment options, including more than 70 in alternative investments, and it provides a sophisticated technology platform that allows more than 2,000 advisers to create portfolios of funds customized for individual clients, Greenberg said.

Monument Advisor policyholders are high net worth clients with $2 million to $10 million of investable assets. They rely on advisers to manage their accounts and will depend upon them to make timely withdrawals to fund their retirements, Greenberg said.

The alternative funds offer many strategies favored by hedge funds and elite institutional investors, he said.

Other annuity writers are becoming more active in the fee-based-adviser market, Greenberg said, including Nationwide, Security Benefit, Pacific Life and, to a degree, Jackson National. Their incentives have been the prolonged low interest rates and volatility in the markets, he said.

More Alternatives

Some are also offering more alternative investments. In October, Nationwide Financial integrated its alternative and fee-based annuity solutions into the company's traditional product offerings.

In November, it added managed volatility funds to its core variable annuity lineup and added three fund options, including a managed volatility fund, to the Nationwide Lifetime Income Rider, the GLWB that can be added to existing nonqualified or qualified variable annuities, but not those inside 403(b) plans.

Cathy Marasco, Nationwide's associate vice president of product management, said the integration of its alternative and fee-based annuity solutions is a recognition that advisers and firms distributing traditional products also have needs for alternative investments and fee-based-- rather than just commission-based-- annuity designs.

As a result, Nationwide's wholesaling team of annuity specialists will also work with distributors of its traditional annuity products.

Traditional annuity distributors now also are able to offer clients Nationwide's fee-based variable annuity, the Income Architect, which the company launched in 2009. Marasco said it is a no-load product with about 60 investment options, a built-in GLWB, a death benefit equal to the greater of contract value or return of premium, and an all-in annual fee of 1%. It does not impose a surrender charge.

"Traditionally, fee-based advisers have had objections to annuities' complexity, high fees and lack of investment flexibility," she said.

"The Nationwide Income Architect is simple to understand and transparent, and it doesn't have all the bells and whistles of a traditional annuity."

Learn More

Prudential Insurance Company of America

A.M. Best Company # 06974

Distribution: Career agents, independent agents and brokers, broker-dealers, banks, direct

Jefferson National Life Insurance Co.

A.M. Best Company # 06475

Distribution: Broker/dealers, fee-only advisers

For ratings and other financial strength information visit www.ambest.com.

By Ron Panko, senior associate editor, Best's Review: Ronald.Panko@ambest.com