Insurers are closely scrutinizing how variable annuities contribute to profitability, capital reserves and risk profile in the current low interest rate environment.
Insurers can push or pull three main levers when adjusting variable annuity risk exposure: fees, withdrawal percentages and step-ups. Over the past year, carriers have increasingly created a sliding scale for these three elements, often tied to an external measure like interest rates or volatility metrics, adding more variability to variable annuities. In addition to ongoing tweaking of the insurance components of living benefits, more developments like this at the underlying fund level are expected throughout the year.
Overall, variable annuity sales look likely to have ended lower in 2012 after three years of growth. Through the third quarter of 2012, total new sales of $109.4 billion were down 6.3% from the same period in the previous year. With third-quarter year-to-date sales at 71.1% of the previous full year, it seems likely that 2012 finished with sales of about $145 billion - down about 6% from the 2011 total of $153.7 billion.
Assets, meanwhile, benefiting from strong investment performance through the end of the third quarter, reached a record high of $1.622 billion - up 14% from the third quarter of 2011 and up 3.9% from the second quarter of 2012.
In the latest ranking of variable annuity sales, also through the third quarter of 2012, MetLife fell from the top spot to No. 3 after the insurance giant shifted its sales strategy to capture fewer variable annuity sales and balance its overall product mix and risk profile. (Prudential and Jackson National became Nos. 1 and 2.)
And more carriers have been trying to pare their risk exposure. In addition to selling its variable annuity distribution business last year, Hartford has announced an annuity buyout for this year. Similar buyout moves were made last year by Transamerica and AXA. In November, Jackson National suspended exchange inflow activity for about a month. Another group of carriers - including Allianz, AXA, MetLife, John Hancock, and Prudential - limited additional contributions to existing contracts and benefits.
Among other carriers making changes, SunAmerica limited the contributions considered for its lifetime guaranteed minimum withdrawal benefits. SunLife sold its U.S. variable annuity business in December to Delaware Life Holdings, owned by Guggenheim Partners. Prudential raised a contract fee, bumping into a fee-limit ceiling at several broker-dealers and potentially affecting sales in the first half of 2013.
On the product development side, fourth-quarter activity remained healthy but was lower than previous periods. Carriers filed 101 annuity product changes in the fourth quarter, compared with 130 new filings in the year-ago quarter. Most of the activity centered on fee changes to existing products and revisions to step-ups and withdrawals.
While a host of carriers trimmed benefit guarantees and raised fees, Allianz and VALIC made their benefits more generous. Meanwhile, Nationwide figured out a way to provide benefit portability. The firm launched a new contract aimed at rollovers from qualified plans that offered living benefits. This contract allows the living benefit from the qualified plan to be carried over, as is, to an individually owned contract.
An earlier version of this article suggested incorrectly that Transamerica had limited contributions to existing contracts.
John McCarthy is annuity solutions product manager at Morningstar.