Subadvisory services have proven an attractive market for many mutual funds, with a surprising amount of interest generated around the relatively small business of variable life. Often linked to variable annuity products offered by the same carrier, variable life subaccounts wield their own appeal.

At the National Association for Variable Annuities' annual variable life conference in Dallas last week, nearly a quarter of the exhibitor booths were occupied by asset managers. Vendors fishing for subadvisory deals included Berger Funds, Franklin Templeton Investments, INVESCO Funds Group, Salomon Brothers Asset Management and Van Eck Global.

An Appealing Fee Structure

Tim Pfeifer, principal and consulting actuary at Chicago-based Milliman USA, pointed out that the fee structure within variable life policies is much more favorable to both the carriers and subadvisors, so much so that "greater interest from asset managers is leading to attractive revenue sharing [for carriers]."

Also, the charges within variable life products are not as dependent on investment performance as other products and therefore generate a more level income stream. Furthermore, recurring premiums help boost revenues. Insurance costs for variable life policies tend to be higher than they are for variable annuities because the variable annuity has become sharply commoditized.

Furthermore, said Pfeifer, variable life products have several properties that generally result in longer persistency of the policies, and thus longer persistency of assets, an attraction for asset managers. Those properties include longer surrender charge periods than variable annuities or redemption fees for mutual funds.

Downward Trends

Nevertheless, the variable life picture is not all rosy: Sales pale in comparison to mutual fund or annuity sales, and numbers are down 25% for the third quarter over last year to $1.3 billion. And the basic structure of variable life as an insurance product creates some barriers to sales that will persist even when the market recovers.

The difficult process of underwriting has led to calls for changes in variable life products. For instance, after cultivating a client and developing a relationship, brokers are often squeamish asking the personal questions involved in determining medical risk.

"They are not going to ask them if they've had gonorrhea, syphilis, or other sexually transmitted diseases, and they're not going to walk out of there with a body part in a jar," said Patti Abram, chief marketing officer at American Skandia.

What is equally troubling is that low sales volume is affecting firms' ability to promote and maintain VL products. Expensive, complex backoffice administration already provides a barrier to entry, but now companies are beginning to back out of the business completely.

According to one source, Merrill Lynch is considering nixing its single premium variable life product. CNA Financial recently announced that it is eliminating its annuity and variable life division.

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