1	The Variable Annuity Business: Insurers, Benefits Keep on “Stepping Up” Presented by: Steve McDonnell, Editor, AnnuityInsight.com
2	Overview The VA Business: What’s Hot, What’s Not, What’s New Variable Annuity Sales: Maintaining Momentum in 2004 Competition Drives Proliferation of Living Benefits What’s Developing: VA Contract Chassis Trends What’s Developing: Investment Platforms Sales Channel Considerations What’s Brewing on the Regulatory Front Industry Issues and Challenges for the Future
3	The VA Business: What’s Hot, What’s Not VAs sales were on record pace through first half, but cooled a bit in Q3… insurers offering Guaranteed Minimum Withdrawal Benefits (GMWBs) continue to do well; Equity subaccount net flows, which recovered strongly last year, continued their upward momentum through May but have fluctuated along with the market since; Companies are monitoring Equity Indexed Annuities (about $16.5B in sales through Q3), as agents are attracted to their promise of market participation with floor protection (as well as the commissions); Within underlying funds, flows are moving to asset managers with sturdy reputations; those hurt by timing scandal lose business, and interesting new advisors enter the variable fund space.
4	Variable Annuity Sales: Maintaining Momentum in 2004
5	Monthly Flows Into 2004: Mirroring Market Moves
6	Top Insurance Companies by YTD Net Flows ($M) through 11/04
7	Competition Drives Proliferation of Living Benefits GMWBs are primary determinant of VA sales, with interesting new enhancements coming out all the time…among favored options are ability to cancel and fee relief if no withdrawals are taken (if benefit is not in the money); Thus Hartford recently filed a new version that allows cancellation while lowering the withdrawal rate to 5%; others have begun to add 5% GMWBs as well; New “lifetime” GMWB options from carriers like Transamerica, Principal Financial, JNL, NFS and Pru/Skandia could shape up as alternative to annuitization…while Lincoln adds ability to lock in investment gains annually; Among provisions being added to protect insurers include required participation in asset allocation models.
8	GMWBs Since Principal First: Some Popular Upgrades Step-up provisions – Earlier versions had five-year step-ups, but some companies, like Lincoln, now have annual lock-ins; Asset allocation requirements – Have become ever more common as they protect the insurer from excessive risk associated with some subaccounts; Ability to cancel – Lincoln, Prudential/American Skandia and recently Hartford allow the rider to be cancelled after five years, as opposed to most others, which are irrevocable; Fee relief – Some companies have the charge on the benefit base; others have provisions allowing for the rider fee to drop off after a period of time; “Credit for time served” – Rewarding people who don’t take any withdrawals over a time period by adding a bonus into the contract or providing other incentives; Varying withdrawal percentages – With several amounts to choose from; 5% maximums become more common; Length of waiting periods –Travelers offers a higher percentage withdrawal if one waits for a few years; Lifetime withdrawal plans – Which could shape up as an alternative to annuitization; RMD provisions – where insurer will not assess a penalty if one exceeds the GMWB withdrawal maximum due to taking Required Minimum Distributions; Interest rate rollups…MAVs – Pru/Skandia has filed to offer a GMWB with a base that grows like GMDBs of the past: by the greater of 5% or MAV over 10 years.
9	Some Recent GMWBs and Their Enhancements
10	The Future of Living Benefits: What’s Next? GMWB election rates and withdrawal patterns, over the long term, are unknown and this could spell trouble for insurers in a prolonged bear market; How generous will GMWBs become? Will other companies follows Pru/Skandia’s lead and offer rollups, MAVs? In future marketing materials, insurers may need to provide clients with projections of multiple GMWB withdrawal schemes (differing percentages, step-up strategies) and to suggest proper use of the feature; Lifetime withdrawal schemes may shape up as an alternative to annuitization and become an important part of the retirement income planning dialogue…especially if companies obtain the ability to apply an exclusion ratio to these payments; In the event that more contract holders begin to annuitize, payout annuity floors could become attractive; For all living benefits, required asset allocation strategies and fund-of-fund portfolios will continue to evolve, as a way to mitigate market risk.
11	Other VA Features, Concepts Currently Emerging Incentives to annuitize through bonuses (RBC Life, Protective, Midland National, Sun Life Financial); Immediate annuities with payout floors (ING, Lincoln National); Other concepts to encourage annuitization include maintenance of trail compensation (MassMutual); Requiring asset allocation for GMIBs (Pac Life, GE); Prudential/Skandia file to offer Highest Daily Value death benefit; Insurers constructing reductions in DB exposure: Penn Mutual, Protective – basing DB on net amount at risk Holistic retirement income departments are evolving, as are thoughts of creating a unified solution (using multiple products, under one provider) to meet retirement needs.
12	Insurers Develop Incentives to Annuitize
13	What’s Developing: Contract Chassis Trends B shares, bonuses and L shares remain the best selling contracts in the industry; “Menu” filings that combine multiple classes in the same registration statement continue to come out; Distribution channels are carefully reviewing VA products on their shelves in light of issues such as suitability and compliance; Such scrutiny has resulted in renewed interest in A share contracts (Jackson National) as they are perceived to have a better cost structure with more transparency for the client; Low-fee, wrap account products (Transamerica, Integrity) come out with fund-of-ETF subaccounts.
14	Notable New VA Contract Filings in 2004
15	What’s Developing: Funds and Investment Strategies Asset allocation fund-of-funds getting rolled out like never before, and may be replacing contract level programs; Master feeder formats adding VIT portfolios to insurers’ trusts (started with American Funds, now Fidelity); Consolidation of subadvised platforms continues (an emphasis towards quality over quantity); Fund fee and expense considerations, revenue sharing, directed brokerage are still a major concern; With market timing still an issue, fair value pricing, redemption fees becoming more common.
16	Top Asset Managers in the VA Space 2003 vs. YTD 11/04
17	Top Morningstar Categories 2003 vs. YTD 11/04
18	VA Fund-of-Funds Assets and Flows $B, 2000-2004
19	New Fund-of-Fund Filings, Offerings in 2004
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21	Benefits of Master Feeder Structures Insurer may use long-term performance record of underlying VIT fund in marketing (as opposed to starting a new subadvised fund that would have no history); If fashioned with a “manager-of-manager” format, allows insurer to replace master fund in the future, just like under a subadvised relationship; Usually insurer adds a 12b-1 fee at the feeder fund level, for extra revenue.
22	What Else is New in VA Underlying Fund Types… Investing in ETFs (Merit, PMFM, Rafferty, Touchstone) Real Estate and/or Mortgage (Neuberger Berman, Waddell& Reed, Huntington, ING) Short Strategies (Rafferty Asset Management, ProFunds, Rydex) Options (ICON) Dividend Capture (Waddell & Reed) Value (Manulife, ING, USAllianz add Legg Mason’s Bill Miller; others entries include some from Washington Mutual, Goldman Sachs, Mercury, American Century, Dreyfus…)
23	The Latest in VA Underlying Funds: New Managers
24	Sales Channel Considerations Captive agency forces and IBD firms remain predominant sales generators for the industry; Suitability and compliance are on everyone’s minds and some platforms are being carefully reviewed – and trimmed as a result; The thought of appealing to more RIAs – with things like low-cost wrap VA products – is intriguing but sales have not yet taken off; Bank channel continues to be attuned mostly to fixed, EIAs.
25	What’s Brewing on the Regulatory Front Pending proposal by NASD to impose specific VA sales practice standards should spur greater scrutiny over compliance and suitability across the distribution chain; SEC also has rule proposals re: disclosure of conflicts of interest, loads, revenue sharing, etc., one rule would require a companion disclosure document at point of sale; The outcome of some Spitzer subpoenas of insurers on VA market timing and late trading is not yet known; Possibility of mandatory redemption fee on frequent trading; VA contract-level asset allocation models are being reviewed, current policy appears to require insurers to have an RIA involved if models are renewed relatively frequently.
26	Industry Issues and Challenges for the Future More M&A activity geared toward building market share and distribution synergies; companies with under $1 billion in assets may be logical takeover targets; New Risk Based Capital requirements will cause need for insurers to set aside more cash to back up benefits, thus impacting profitability; Market timing questions remain, such as how to add redemption fees, especially to older variable insurance contracts; Aggressive tweaking to GMWBs causes analysts to warn insurers about their risks in a prolonged down market;
27	Industry Issues and Challenges for the Future More death benefit risk reduction measures will be devised: creating ceilings, payout maximums, structuring benefit based on net amount at risk; Annuitization bonuses, immediate annuities and payout floor rider designs will evolve, yet new compensation structures must be created to truly “jump start” annuitization in the coming years; Bush tax-deferred savings proposals (RSAs, LSAs, etc.) may again gather steam…industry is especially concerned about how LSAs may negatively impact on VA sales; Hope on the legislative front: proposed bill H.R. 4849 would exclude taxes on life contingent annuity payments (from NQ contracts) by 50 percent, up to a cap of $20,000.
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