The variable annuity value proposition appears to be eroding, as mutual fund sales outpaced those of annuities during the second quarter, and more of the same is expected through next year.
Data released this month by Kehrer-Limra shows mutual fund sales up 55.9%, to $10.6 billion, in the quarter compared with the previous one. Meanwhile, variable annuity sales rose 17%, to $10.3 billion. Variable annuity sales were down 19.5% from a year earlier, and mutual funds sales were down 31.2%, according to the Princeton, N.J., research firm.
"The increase in variable annuity sales is nice, but they still are way below where they were a year ago," said Kenneth Kehrer, the firm's research director. "Mutual fund sales have recovered much more quickly. I think these results indicate the real underlying question right now — are higher fees and watered-down benefits hurting [variable annuity] sales? First blush suggests they may indeed be."
Typically, variable annuity sales and mutual fund sales move together, depending on market conditions, Kehrer said, "and if people like the costs and benefits of a variable annuity, they should do better than mutual funds, and if investors don't like the costs and benefits, then these products will do worse."
During the past 18 months, the benefits associated with variable annuities proved to be "a bargain" for investors, but many annuity providers have now eliminated guarantees, or raised prices, because difficult market conditions made such benefits costly. Kehrer said it could be a tough year ahead for variable annuity sales as "sticker shock" affects sales.
"From a couple focus groups that I've run in the past month," he said, "one with advisers and sales managers and another with people who run bank investment programs, both seem to be uncomfortable with bringing up variable annuities with their customers. People are leaning toward solutions that are mutual-fund-based over variable annuities."
Some companies are still delivering strong variable annuity sales. The U.S. division of Sun Life Financial Inc. reported last week that its variable annuity sales in the first half rose 35%.
The Wellesley, Mass., division reported variable annuity assets grew 10.7% in the first six months of this year. It said it has almost doubled its market share in variable annuity sales this year and that 91% of its new variable annuity sales in the first half included at least one optional living benefit.
"Even with recent changes to bonuses and other living benefits, the need [for] and strengths of [variable annuities] has not changed," said Terry Mullen, the president of Sun Life Financial Distributors, "and neither has the upcoming [Baby] Boomer retirement wave."
"Looking ahead to 2010, we are confident this trend will continue and upcoming changes in tax laws will make long-term-care options with annuities even more attractive," Mullen said.
Companies like MetLife Inc. are introducing simpler variable annuity products. Kevin Crowe, the managing director of the bank channel at MetLife, said its Simple Solution Variable Annuity, which it introduced in July, is easier for bank representatives to sell. The targeted buyers, individual investors at or near retirement, want products with a guarantee, he said, similar to a certificate of deposit.
Kehrer said other companies are developing variable annuities but that he does not expect anything to reach the market until November.