By historic standards, 2012 started out about average for variable annuity issuers in terms of SEC filing activity, with a total of 59 annuity product changes in the first quarter com pared with 130 filings in the fourth quarter of 2011 and 49 in the first quarter of last year. Compared with the level of activity before the financial crisis, this indicates a relatively slow pace of innovation for the industry. This is not surprising given low interest rates and concerns about the risks that lifetime guaranteed withdrawal benefits and other retirement income guarantees present to the insurer.

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The market apparently expects the sluggishness to continue all year. While new products will still be launched, the pace is likely to be more measured and benefit structures will continue to evolve toward more of a shared-risk model.



The Hartford shocked the industry in March when it announced plans to exit the market. But the move made sense based on the firm's slumping sales. Long an industry anchor, The Hartford's sales nosedived to $900 million in 2011 from more than $9billion in 2001, a 90% drop.

As the first carrier to introduce a withdrawal benefit, The Hartford booked a huge amount of business that carried no asset allocation restrictions or other mechanisms to protect the firm in a declining market. Withdrawal guarantee liabilities mounted significantly after the financial crisis, requiring onerouslevels of capital reserves that worsened as the present value of those liabilities grew with falling interest rates. Other firms, such as ING and Sun LifeFinancial, faced similar difficulties and quit variable annuities with plans to focus more on profitable lines of business. However, other companies,including MetLife, Prudential and Jackson National, are focused on developing sustainable risk management products for the long haul.

Now firms are raising fees and reducing benefits, or tying benefit val-ues more closely to market variables, such as Treasury rates. But there has also been some development of simpler structures for the fee-only and fee-based advisory channel. Sales of such products have not taken off, but with demographics on their side (boomer retirement issues will only become more pressing), their time may come. Boomers need guaranteed income, and simplified VA products could carve out a niche that meets this need.

Insurers that offer guaranteed income features are not home free, however. Consumers must first understand how the features work and believe they are worth the extra expense.



The industry's sales flows have been climbing slowly from the depths of the financial crisis. New sales of variable annuities in 2011 were $153.4 billion, 12.3% higher than 2010 new sales of $136.6 billion. Net cash flow for the year came in at $27.7billion, the highest level since 2007, when net flow was $34 billion; this was a sharp contrast to the decade's low point of $17 billion, reached in 2009.

The numbers, particularly growth in net cash flow, indicate growing advisor and investor demand. Advisors and investors should closely watch how the remaining players respond to their demand and whether they can take on enough risk for advisors and investors to believe variable annuities hold sufficient value.

Frank O'Connor is product manager for annuity data at Morningstar. John McCarthy is the research firm's product manager for annuity solutions