Bruce Ferris, senior vice president of sales and distribution for Prudential Annuities, he has heard all the objections from wholesalers and advisers concerning variable annuities.
The investment community complains that the products are too expensive or too complicated, but Ferris is certain that even though VA assets under management declined over the past two years, "they aren't going away." In fact, he said the attitude about variable annuities is beginning to change.
"In the past 18 months, retirement savings have atrophied by 40%, and that is starting to change a lot of attitudes about these products," Ferris said in an interview. Following the Great Recession, "people like the idea of a product with a guarantee."
Ferris said the success of Prudential Financial Inc.'s U.S. annuity business is evident. Last year, the company's annuity sales rose 58.3% to $16.3 billion from a year earlier, and fourth quarter sales rose 71.4% to $4.8 billion from a year earlier.
"Variable annuities provide us with the ability to offer downside protection and upside market participation," he said. "We can put a floor under an investment. It is a unique value proposition to have. The question is no longer if [variable annuities] are appropriate, but what percentage of assets should have this protection."
In the bank channel, Prudential Annuities has had substantial growth. Its bank sales of variable annuities increased 152% to $1.8 billion from a year earlier, as the company added 15 new banks to its distribution list. In the third quarter, Prudential ranked first in bank sales of variable annuities, according to VARDS. In 2002, Prudential ranked 14th in bank sales.
"Bank clients look at CDs, fixed annuities and fixed income as safer havens than equity products," Ferris said. "But right now, they are finding it difficult to generate yields in fixed income or finding products that offer attractive returns for their retirement income savings. This is generating more interest in variable annuities."
Prudential Annuities has nearly doubled its wholesalers in the bank channel in the past two years, increasing its sales force to 26 from 14 in 2007. "We want to continue to add selectively from here," Ferris said. "We are confident that we have the right resources and support for bank clients. My job is to manage costs associated with this business, and we have made a significant investment in the bank channel over the last four to five years, and we are really starting to reap the benefits of that investment in our sales results."
That doesn't mean the Newark, N.J.,-based company plans to stop investing in bank channel sales of annuities, he said. "We have sustainable momentum in the channel," Ferris said. "Look at our industry: banks represent 12% to 13% of total industry annuity sales. We are right in that wheelhouse. I expect to continue to grow our business, and I am looking at doing that across all channels."
Nonetheless, analysts say that some advisers remain skeptical of variable annuities. Fixed annuity sales heavily outweighed variable annuity sales last year as many banking companies shied away from variable products because the guarantees associated with these products became too expensive, according to Michael White of Michael White Associates.
The strain that the market crash put on guaranteed-income rider providers is behind much of the change. Many providers have eliminated guarantees or raised their prices.
Second-quarter figures from the research firm Kehrer-Limra showed that variable annuity sales rose 17% in the quarter, compared with the first quarter, well behind the 55.9% gain posted by mutual funds. The disparity is striking, because sales of the two products usually move in tandem.
In fact, the net sales of variable annuities has halved to $23.8 billion in 2008 from $46.8 billion in 1999.
In the fourth quarter, variable annuity sales increased 3% to $32.6 billion from the previous quarter, according to LIMRA's U.S. Individual Annuities quarterly sales survey.
"The last time VA sales were at this level was in 2003, at the end of the last financial crisis," said LIMRA Research Director Joe Montminy. "While we are seeing VAs slowly recover, the recovery is slower than expected."
Ferris admitted Prudential has not won every adviser over. "There are still naysayers, and there always will be," he said. "But we attracted 20,000 new producers last year who never sold our products before and who are now offering Prudential annuities. That is two-fold our previous record of new producers. I think this is evidence that advisers recognize that given recent market conditions, variable annuities are a solution that makes sense for many clients."
Prudential is not alone. Sun Life Financial Distributors Inc., the U.S. division of Sun Life Financial Inc., is looking for ways to increase sales of the product through banks. Last month, the company hired Leslie Hunnicutt as a senior vice president and a national sales manager to increase sales through banks.
The Wellesley, Mass., based unit vaulted into the top 10 providers of annuities through banks last year, she said, as it increased variable annuity sales 22% in the channel last year. This year, it plans to further increase sales.
Sun Life has 19 wholesalers in the bank channel, up from 15 a year earlier, and plans to add another this year as part of its effort to become a "top five player overall," she said.
This year, Prudential Annuities has continued its strong sales from 2009, Ferris said. As the S&P 500 has slumped, he said, "investors that are concerned that they missed the run up are more interested in investing in a product that offers downside protection."
"My objective is to sustain the momentum from last year," Ferris said. "We had tremendous growth last year, and we want to continue to be a partner of choice for banks. We have already had a fair amount of success drawing banks and broker/dealers, and we want to continue that."
Analysts expect a "new era of stabilization and rationalization" in variable annuities, according to a report by Cerulli Associates Analyst Lisa Plotnick in Boston.
She said insurers can't aggressively try pricing each other out of the market with increasingly elaborate riders because that strategy has failed. This "arms race" didn't bring much in the way of new assets into variable annuities, Plotnick said. While she doesn't have figures for all of last year, the first three quarters indicated $14.1 billion of net variable annuity sales. For all of 2008, that total was $23.1 billion. But five years ago, net sales totaled $40 billion.
To maintain more long-term stability, Plotnick said, insurers should generally stick to four to six products and fewer than 80 sub-accounts, or investment fund options within a variable annuity.
While many competitors have stopped introducing new variable annuities, Prudential plans to continue to introduce more products. "We have a reputation of being an innovator, and we think that we can continue to be one," Ferris said. "We are always looking at new ideas, and we are in constant discussions within our organization. We think that we are in a good place right now with our product set, and we certainly don't want to make changes for the sake of change, but we are always considering new ideas."
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