Price war! Insurers fight it out

A price war that one top executive calls “irrational” is hammering companies that sell variable annuities at a time when sales are on the skids.

Variable-annuity sales are expected to shrink by as much as 10% this quarter on top of an estimated 12% drop in the first quarter over sales in the last three months of 2000.

The war’s rising pitch prompted Joseph Gasper, president and chief operating officer of Nationwide Financial Services Inc., to complain during the company’s first-quarter earnings conference call earlier this month that competitors were engaging in “irrational” pricing.

Mr. Gasper told Wall Street analysts that competitors were paying out more in commissions and other incentives than they could expect to recover from sales after subtracting sales, management and other costs.

Nationwide, based in Columbus, Ohio, saw its gross sales of individual variable annuities in the first quarter drop 21% to $1.28 billion from sales in the same period a year earlier.

Though Mr. Gasper declined to say which insurers were behind the commission hikes, a knowledgeable source says the Nationwide executive was referring to recent moves by American Skandia Inc., Pacific Mutual Holding Co., ING Groep and General Electric’s GE Financial Assurance Holdings Inc. unit.

“Commission rate promotions have been going on for a very long time,” says Cindy Saccocia, a variable-annuities analyst at Cerulli Associates Inc., the Boston consultancy. “But it’s now common for promotions to last over an extended period of time.”

She adds, “We’ve seen them expand from month-to-month to quarter-to-quarter; now we’re seeing some rates for the whole year.”

battle for share

Wade Dokken, CEO of American Skandia in Shelton, Conn., told analysts late last month that competition for annuity business has risen to such a level that avoiding the current sales promotion derby would have put the unit of Sweden’s Skandia Insurance Co. Ltd. “out of the business.”

Though annuity sellers agree the market has become difficult, they say they aren’t buying business at a loss.

“I think it’s hyperbole,” says Toby Hoden, chief marketing officer for investment products at ING Americas in West Chester, Pa. “We have strict risk-management procedures. There’s no room for any kind of irrational results.”

A spokesman for Pacific Life of Newport Beach, Calif., says of its commission increases and other promotions, “It’s a confidential matter between our brokers and clients. We really don’t want to discuss it right now.”

Mary Fay, senior vice president of variable-annuity products at GE Financial Assurance in Richmond, Va., didn’t respond to an interview request.

In January, Mr. Dokken launched a so-called dollar-cost-averaging promotion for America Skandia’s Advisor Plan II annuity, which pays a 14% annualized yield during a six-month transfer program and 8% over a 12-month plan.

Under dollar-cost-averaging promotions, annuity buyers initially place their investment in a fixed account that pays an above-market yield. The investment is gradually transferred to a stock fund over six to 12 months.

Not to be outdone, this month Hartford Life matched Skandia’s 14% teaser rate in its six-month dollar-cost-averaging plan.

“Some of our competitors are implying that we are buying market share,” says John Walters, executive vice president of investment products at Hartford Life, a unit of Hartford Financial Services Group Inc.

“That is not accurate. We have eliminated some of the historical disadvantage we had in terms of price, but we are winning the war in terms of distribution and in terms of product design.”

opportunistic

Hartford sold $2.3 billion in variable annuities in the first quarter, up 12% over last year’s fourth quarter, suggesting the company took business away from many of its competitors.

Prior to American Skandia’s dollar-cost-averaging entry, Mr. Dokken had criticized such promotions as uneconomical. “We’ve changed our mind on this one,” he told analysts in a conference call last month. “It seems like an opportunistic thing for us to do today.”

The promotion is generating an estimated 8% to 10% of American Skandia’s annuity sales.

In addition, last month American Skandia began paying an additional 1% upfront commission on nearly all new annuity sales.

That includes C-share annuities that typically carry an annual 1% trailing commission and no surrender charge for withdrawals.

C-share annuities usually charge 1.40% to 1.65% in annual mortality and expense risk fees.

Mr. Dokken’s willingness to reverse his position on dollar-cost-averaging promotions and employ other sales incentives underscores the sharp effect that declining equity markets have had on both annuity sales and the fees insurers collect on annuity account balances.

In this year’s first quarter, Skandia’s variable-annuity sales declined 60% from last year’s first quarter to $1.1 billion. Mutual fund sales fell 54% to $751 million. The company’s job cut announcement in late March is part of a plan to save $38 million in annual expenses through cuts in employee pay and benefits, and other discretionary expenses.

In a March filing with the Securities and Exchange Commission, American Skandia Life reported that sales of variable annuities and variable life insurance policies had created a temporary cash strain, requiring a $69 million infusion from its Swedish parent to support the U.S. operations.

That infusion was nearly double a $34.8 million infusion in 1999. American Skandia raised another $476 million last year through securitizations of the fees it collected on its annuities.

A Skandia spokesman says that the U.S. unit’s cash needs were a result of robust asset growth, and that as sales have slipped, cash flow has improved.

Mr. Dokken says he hasn’t set an ending date for the promotions.