August 30, 2016

The Leading News Source for Financial Advisers InvestmentNews.com

How insurers are losing when it comes

to variable annuities
Tight restrictions are placed on investment options in VAs with guaranteed income to reduce their risk. Returns
have lagged as a result, frustrating advisers and investors.

By Greg Iacurci

Variable annuity sales have been on a

steady decline the last several years, with
market volatility, growing popularity of
indexed annuities and a looming Labor
Department regulation being primary
contributors.
But insurance companies have also shot
themselves in the foot by severely limiting
investment choice on annuity products
bought with income guarantees following
the financial crisis.
These restrictions which come via
mandated use of managed-volatility funds
or conservative asset allocations in VA
products have watered down investment
returns, angering consumers and advisers
alike as the products have lagged the broader
stock market. the advisers and investors using variable Theres no benefit in having more fixed-
The frustration with investors is that annuities (rather than more conservative income exposure in a VA with living-benefit
theyre in these 60-40 [stock-to-bond] annuities) to maximize returns and generate exposure, he said.
blend and managed-volatility allocations, the most guaranteed income, according to Although insurers imposed few
and those are underperforming the S&P insurance experts. investment restrictions prior to 2008,
500 because theyre less exposed to equity, Reps Ive talked to want to go as fast contract limitations became more prominent
said Gregory Olsen, partner at Lenox as they can inside a variable annuity, said following the financial crisis as companies
Advisors Inc. Kevin Loffredi, senior product manager of sought ways to mitigate their risk.
When factoring in product fees, annuity solutions at Morningstar Inc. Due to the way VAs with lifetime-income
performance has been kind of blah, he Because VAs with a lifetime-income guarantees are structured, while investors
said. feature provide downside protection in the account balances dropped precipitously
Taken together, the restrictions represent form of a guaranteed income floor, many during the downturn, there wasnt a
a sort of disconnect between insurers, advisers prefer investing with aggressive corresponding drop in the promised
who are trying to mitigate their risk, and equity allocations, Mr. Loffredi said. benefits. That left insurers exposed to a

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gigantic liability they never expected to
happen, according to Scott Stolz, senior
vice president of Private Client Group
investment products at Raymond James &
Associates Inc.
However, investment limitations are
meant to create more stable account values
and lower risk when offering guaranteed
lifetime income benefits.
Now, nearly all of the top variable
annuity living benefit writers require such
account-value risk mitigation strategies,
according to an Insured Retirement
Institute report from December.
According to Alison Reed, executive vice
president of operations for Jackson National
Life Distributors, the biggest change post-
crisis was the introduction of managed-
volatility funds.
The funds aim to buffer investors from big
market swings, protecting on the downside
but, consequently, not capturing as much
upside.
While the S&P 500 returned 1.4%, 13.5%
and 32.2% in 2015, 2014 and 2013, respec-
tively, asset-weighted average net returns in
managed-volatility VA sub-accounts lagged, at
a respective -3.5%, 3.5% and 15.3%, according
to Morningstar.
The number of managed-volatility sub-
accounts, which are like mutual funds inside
VAs, is up 240% since 2006, to more than
7,100 from approximately 2,100, according
to Morningstar.
Assets in VA managed-volatility portfolios
increased markedly over that period,
ballooning to $133.2 billion through June
from $25.1 billion as of year-end 2006,
according to Morningstar.
Such funds now capture more than half
of net positive cash flow, and use of these
strategies is unlikely to abate, IRI says.
Insurers also have required more
conservative allocations when coupling a
VA with a living-benefit rider. For example,
rather than allow investors to put 100% into
equities, many firms may put guard rails
on asset allocation by allowing up to 60%
in equities, with the rest in fixed income or
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cash, Mr. Loffredi said.
According to IRI, whereas large-cap
blend funds benchmarked against the S&P
500 once held the lions share of assets,
money has moved dramatically toward
more conservative funds. Over 2005-15,
conservative allocation funds gained
about 7 percentage points in market share
and moderate funds about 10 points,
according to the IRI report. Large-caps lost
about 15 points.
Some insurers take an even more
regimented approach by dictating that
particular percentages of an equity bucket
can go to small-cap funds, large-cap funds,
etc., Mr. Loffredi said.
Such restrictions kind of defeat the goal
of having a variable annuity, according to
Mr. Stolz of Raymond James, which has
about 6,700 advisers.
Its like getting double insurance, Mr.
Stolz said. Ive been telling our advisers for
four years now, if youre going to buy a VA
with a living benefit you have to invest the
money as aggressively as the contract allows
and the client is comfortable with.
VA DECLINE
Industrywide variable annuity sales have
been on a multi-year decline. New VA sales
decreased each year of 2011-15, going from
nearly $158 billion in 2011 to $133 billion
last year.
August 30, 2016
Although its not the only factor,
investment restrictions factor tremendously
into these declines, Mr. Stolz said. And hes
not alone in believing that.
Mr. Loffredi points to VA sales of Jackson
National, which doesnt impose any fund
restrictions, as evidence of adviser and
investor preference for open-architecture
VA platforms. Jackson, the No. 1 VA seller,
is the only one among the major insurers
that doesnt impose some sort of investment
restriction, he said.
Over 2006-15, Jackson saw net annual sales
increase a whopping 225%, to $23.1 billion
from $7.1 billion, according to Morningstar.
Among the top 10 VA sellers last year,
about half posted gains in new annual sales
over the same period. In percentage terms,
the closest to Jackson was Transamerica,
which posted a 114% increase to $7.9
billion in sales, a third of Jacksons total.
Jackson is one of the main carriers Mr.
Olsen of Lenox Advisors uses with clients
seeking VAs with guaranteed income riders,
due to its lack of restrictions (as well as its
strong credit rating), he said.
Of course, advisers and clients may have
goals other than boosting investment return,
such as maximizing guaranteed income
from day one. In that case, other insurance
companies and potentially other annuity
products may be the answer, advisers said.
 For additional information on the potential benefits of variable annuity products, please consult
your Wholesaler or visit www.jackson.com.

Bank and Financial Institution Representatives: 800/777-7900 in New York: 888/464-7779

Independent and Non-Bank Broker/Dealer Representatives: 800/711-JNLD (5653)
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The opinions and forecasts expressed are those of the author and individuals quoted and should not
be construed as a recommendation or as complete.
Before investing, investors should carefully consider the investment objectives, risks, charges
and expenses of the variable annuity and its underlying investment options. The current
contract prospectus and underlying fund prospectuses, which are contained in the same
document, provide this and other important information. Please contact your Internal
Wholesaler to obtain the prospectuses. Please read the prospectuses carefully before
investing or sending money.
Variable annuities are long-term, tax-deferred investments designed for retirement, involve risks
and may lose value. Earnings are taxable as ordinary income when distributed and may be subject
to a 10% additional tax if withdrawn before age 59.
Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of
the variable annuity.
Guarantees are backed by the claims-paying ability of Jackson National Life Insurance Company
(Home office: Lansing, Michigan), and Jackson National Life Insurance Company of New York
(Home office: Purchase, New York) and do not apply to the investment performance of the
separate account or its underlying investments.
Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing,
Michigan) and in New York by Jackson National Life Insurance Company of New York (Home
Office: Purchase, New York). Variable annuities are distributed by Jackson National Life
Distributors LLC, member FINRA. May not be available in all states and state variations may apply.
These products have limitations and restrictions. Contact Jackson for more information.
Standard & Poor's is not affiliated with Jackson National Life Distributors LLC. S&P, S&P 500 and
Standard & Poor's are trademarks of The McGraw-Hill Companies, Inc., and have been licensed
for use by Jackson National Life Insurance Company. The product is not sponsored, endorsed, sold
or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of purchasing the product. The S&P 500 Index is unmanaged and not available for
direct investment. Index performance does not include the reinvestment of dividends.
The S&P 500 Index is a market capitalization-weighted index of 500 stocks that are selected by
Standard & Poors to represent a broad array of large companies in leading industries. The S&P
500 Index is unmanaged and not available for direct investment. The payment of dividends is not
reflected in the index return.
Jackson is the marketing name for Jackson National Life Insurance Company and Jackson National
Life Insurance Company of New York. Jackson National Life Distributors LLC.
For representative use only. Not for public distribution.

Reprinted with permission from Investment News.

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