ANNUITY MONEY FLEES INSURERS’ HANDS: ALMOST ALL ’99 ASSETS FLOW TO MUTUAL FUND MANAGERS, STUDY SAYS

Who’d’a thunk it? Financial advisers don’t trust insurers to manage the assets in variable annuities, even though they invented them.

Nearly all of the money going into the subaccounts of variable annuities this year is landing in what are being dubbed “rental managers,” mutual fund companies that invest assets of annuities sold by banks, brokers and insurance agents.

Mutual fund companies picked up $15.2 billion worth of such assets from January through June, dwarfing the $27 million that went into variable annuities managed in-house, most of it by insurance companies.

“It’s basically brand name,” says Raymond Liberatore, an analyst at Financial Research Corp., which just completed a study of variable annuities and – not so coincidentally – is in the business of pairing money managers with sellers of annuities. “Insurance reps and brokers that sell variable annuity products are looking to sell brand names. It’s an easier sale for them.”

In other words, despite years of handling the trillions policyholders pour into their coffers, buying up mutual fund companies and spending millions to advertise themselves as providing more than just insurance, financial advisers and the public still don’t think of insurers as money managers.

big bucks biz

Variable annuities, which are essentially mutual funds wrapped in insurance policies, represent big business for the companies that manage the assets, since they stand to collect fees beyond the normal.

Variable annuities are often expensive and complicated. Because of the insurance features, variable annuity investors pay average annual fees of 2.09% of the value of their investment, compared with 1.55% for the average stock mutual fund. Externally managed variable annuities are even more expensive, with an average annual cost of 2.17%.

But investors, lured by tax advantages and prodded by sellers earning high commissions, are buying them. Since yearend 1995, the assets of variable annuity subaccounts that use outside managers have grown at a much faster clip than their in-house counterparts – 52% vs. 25%, respectively, says FRC.

Today, nearly 36%, or $237 billion, of variable annuity assets are in externally managed accounts. That’s up from 29%, or $145 billion, at the end of 1997, says FRC.

The study also concludes that externally managed variable annuities outperformed their internally managed counterparts over relatively short periods. The average return for a stock fund variable annuity managed by an outsider for the 12 months ended June 30 was 15.66, vs. 12.30% for an internally managed annuity.

Over three years, the average externally managed annuity returned 18.63%, vs. 18.10% for one internally managed.

The business of managing outside subaccounts is dominated by three companies. Wellington Management runs $39.1 billion, Fidelity Investments weighs in at $34.3 billion and Janus oversees $20.4 billion. T. Rowe Price is a distant fourth with $11.9 billion.

In September, TIAA-Cref, which has been providing pensions for college teachers for decades, launched its first variable annuity for the public with a fee of a 0.37%, almost 1.75 percentage points below the norm.

“There is a huge market opportunity and demand for this kind of product,” says Claire Sheahan, a spokeswoman for TIAA-Cref.

In another sign of increased competition, Fidelity recently dropped its surrender charges, which are imposed on accounts closed sooner than expected.

Good thing. Fidelity is starting to feel the heat of new competition. During the first six months of 1999, the company picked up $600 million in externally managed assets – giving it a 4% share of the market. That compares to all of 1998 when Fidelity took in $1.9 billion and controlled 7% of the market, according to FRC.

Fidelity disputes the data, saying its sales have increased significantly.

During the first six months of 1999, Janus took in $3.01 billion in variable annuity assets. Wellington Management came in second with $1.68 billion, followed by Bankers Trust Co., with $1.13 billion, according to FRC.

Michele Van Leer, senior vice president of retail product management at John Hancock Mutual Life Insurance Co., concedes investors may be drawn to variable annuities managed by names they know. “But, when it comes to making the asset allocation, they are more interested in investment style, the kinds of fees that are being charged and investment performance.” She says that 82% of new money going into variable annuities sold by Hancock ends up in funds it manages, with the rest handled by firms including Janus, Invesco and Neuberger Berman.