Income for Life Guarantees Draw Investors, but Industry Cools to Variable Annuities

U.S. sales of variable annuities – insurance products guaranteeing income for life – rose 13 percent in 2011, though sales slowed in the fourth quarter of the year, snapping six quarters of gains, according to data released today by LIMRA, a global insurance industry consulting group.

The fourth quarter decline in variable annuity sales reflects insurers’ efforts to manage risk, rather than a reduced demand for the product, according to industry experts. Demand for investments guaranteeing income for life has been driven by “extreme market volatility,” according to Cathy Weatherford, president and chief executive office of the Insured Retirement Institute, a trade association.

But the same market volatility that attracts investors to variable annuities makes the products less attractive to insurers, who guarantee the clients a fixed income no matter how poor the performance of the products’ underlying investments. The potential downside prompted Canadian insurer Sun Life Financial Inc. to stop selling variable annuity products in the United States at the end of last December. Dean A. Connor, company president and chief executive officer, said the decision was based on “unfavorable economics which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value.” Glenworth Financial Inc. followed suit in January when, according to The Wall Street Journal,  it announced it was exiting the variable annuity market.

Variable annuity sales totaled $38.4 billion in the fourth quarter, a less than 1 percent decrease from the fourth quarter of 2010, according to LIMRA, which bases its data on reports from 60 companies, representing 94 percent of total sales. MetLife – one of the nation’s top providers of income for life products - reported fourth quarter decrease in variable annuity sales, which totaled $7.2 billion, down from more than $8.5 billion in the third quarter of 2011.

“Companies are looking to manage their risk in the kind of products they’re offering, and as a result it has had an impact on the sales,” Joseph Montminy, assistant vice president of annuity research told Bloomberg News today.

At the same time the insurance industry appears to be backing away from variable annuity products, the federal government is taking steps to make it easier for retirees to convert their 401(k) accounts into annuity products guaranteeing income for life.

“When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings,” said Tim Geithner, Treasury Secretary, in a statement announcing a proposal to improve access to retirement income products. The proposal is designed to address the difficulties many retirees face in managing and spending down their retirement savings.

“Some retirees may forecast that they will live only to or just past the average life expectancy, only to far outlive their savings by living much longer,” according to a joint statement from the Treasury and Labor Department. “Other retirees, fearful of exhausting their savings, may unnecessarily restrict their spending and not reap the benefits of the funds they have saved.”

Among other things, the proposed rules would make it simpler for retirement plan providers to offer a “partial annuity option,” allowing retirees to invest a portion of their 401(k) assets into a product guaranteeing income for life. The rules would also remove a regulatory obstacle to purchasing a deferred longevity annuity, and would clarify rules regarding spousal protection and products guaranteeing income for life.

Annuity ownership rises with wealth, according to a fourth quarter study on financial product usage by Millionaire Corner.Thirty percent of high net worth investors – those with $5 million to $25 million in investable assets - own variable annuities for an average balance of $491,000, and 25 percent own fixed annuities for an average balance of $472,000.  Fewer than one-fourth of investors with $1 million to $5 million own variable annuities and 27 percent own fixed annuities. Less than 20 percent of non-millionaires, who have investable assets between $100,000 and $1 million, own products guaranteeing income for life.