Others retreat, but this carrier is charging into the VA business

Concerned about promising more than they can deliver, bigger insurance companies have been retreating from the variable annuity business of late. But that industrywide retrenchment hasn't stopped smaller companies from charging into the VA space. Sammons Retirement Solutions, a new unit of Sammons Financial Group and a sister company to Midland National Life Insurance Co., next month will release a new variable-annuity product next month that will boast an investment menu with as many as 80 selections. The entry of fixed-income-annuity specialist Sammons into the VA space comes on the heels of a rough 2011 for sellers of variable annuities. Low interest rates, coupled with a flat stock market, have raised both the cost of hedging the annuities and the long-term exposure on carriers' balance sheets. That, in turn, has led some insurers to put the brakes on sales. Last year, MetLife Inc. and Prudential Financial Inc. pared back on variable annuity living benefits amid an increasingly difficult equity and interest rate environment. In December, Sun Life Financial Inc. abandoned its U.S. variable annuity business entirely. But Sammons is taking a different approach. The secret to competing in the VA market is to emphasize the simplicity and tax deferral advantages of the products, rather than the guaranteed-living benefits, said Sammons Retirement president Bill Lowe. “We're going to focus on addressing the three primary reasons advisers stay away from variable annuities: cost, complexity and the unwillingness to tie up customer funds,” he said. “We're not going to compete in the guaranteed-living-benefits space.” Instead, Mr. Lowe, a veteran of ING Groep NV's U.S. annuities business, wants to target rollover cash that would otherwise go toward advisory accounts, mutual funds and other investment options. “The overall variable annuity market is growing, but the nonqualified portion has shrunken,” he said. Qualified annuities are purchased by an employer as part of a retirement plan and are funded with pretax dollars, while nonqualified annuities grow tax-deferred until withdrawals begin. Changes in tax law over the past decade have reduced taxes on capital gains and dividends to 15%, making clients more willing to invest their nonqualified dollars in other vehicles than variable annuities, Mr. Lowe said. Also, customers began buying VAs with the living benefits in mind as opposed to using them to help build savings on a tax-deferred basis. Veering away from guaranteed-living benefits allows Sammons to offer a cheaper product with a wider array of investments — the carrier won't have to hedge against volatility to maintain those living benefits. “Companies are interested in whether they can hedge a particular investment option, so you don't see a lot of sector funds, alternatives and emerging markets,” Mr. Lowe said. “We want a platform where the fund selections aren't based on whether we hedge them or not.” Since entering the broker-dealer space will demand an expanded sales force, Sammons added 20 new internal wholesalers and 20 external wholesalers, with most of the new hires joining in December.