A silver lining in cloud over sales of annuities

Life insurance and annuity industry executives remain upbeat despite the faltering economy.

That was the sentiment shortly before last week’s market carnage as industry executives gathered before Wall Street analysts at a San Diego conference sponsored by the Association of Insurance and Financial Analysts.

Though most executives expected gross sales of variable annuities to be flat in the first quarter compared with the previous and year-earlier periods, net sales could rise by single digits.

Nationwide Financial Services Inc. of Columbus, Ohio, expects its variable-annuity sales to fall between 15% and 18% for the full year if the volatile equity markets continue. The company derives 47% of its earnings from them.

“We are working like heck to diversify away from that,” said Richard Karas, president of life company sales, citing efforts to expand in fixed annuities and insurance.

However, Mr. Karas added that variable-annuity outflows from 1035 exchanges into competitors’ bonus-annuity offerings were easing. Since early last year, Nationwide has been calling customers who request a transfer.

customers staying

“Many didn’t know they were being 1035’d,” said Mr. Karas. So, though the insurer’s variable-annuity sales are down, it is holding on to more of its existing business.

Nationwide is also focused on an effort to lure brokers away from the traditional structure of high upfront commissions on initial sales to a more level fee-based, or trail-compensation, system.

Mr. Karas said the insurer sold $1 billion of so-called C-share, or trail-based, annuities last year, while 45% of its total sales had some form of trailing payment.

Wade Dokken, president and CEO of American Skandia Inc. in Shelton, Conn., predicted that bonus annuities, in which companies typically offer 1% to 5% credits on annuity purchases in exchange for higher expenses, would continue to grow in importance, arguing that the marketing gimmick gives investors a better deal.

Skandia is one of several carriers that have built market share in recent years by successfully urging brokers to switch clients into its bonus-annuity offerings. Mr. Dokken said he intended to use the current market downturn to take market share from competitors.

Some executives worried about annuity pricing practices and the specter of potential enforcement actions by the Securities and Exchange Commission.

skepticism voiced

“I believe it is insane to drive top-line growth at the rate we are seeing some of our competition today,” said David D’Alessandro, president and CEO of John Hancock Financial Services Inc. in Boston.

“If you start to tear apart the return on equity in the product of some of our competition, I don’t care what their volume is, they have no predictability on how long it is going to stay on the books. That’s a financial problem,” he added.