The third quarter has seen a higher sale of variable annuity (VA) products, led by increased demand from consumers for guaranteed lifetime income. This reflects that the current uncertain market condition is compelling risk averse Americans to look for products that would provide them stable and assured returns.
VA are contracts that accumulate funds and pay out a variable income stream. Premium in a variable annuity product is invested in a fund similar to a mutual fund and the amount to be paid to the investor is driven by the investment performance of that fund.
According to Bloomberg, total industry VA sales in the third quarter upped 15.1% year over year to $40.2 billion. This increase was primarily led by MetLife, Inc. (MET”>MET) which saw an 83% increase in VA sales over the prior-year quarter. The overall increase was, however, partly offset by a 17% year- over- year decline in VA sales at Prudential Financial Inc. (PRU”>PRU).
The strong sales growth at Metlife was primarily due to aggressive marketing by distributors who pushed the product ahead of the reduction of the 6% minimum guarantee feature scheduled for January 2012.
During the third quarter, Prudential’s VA sales were down 17% year over year to $4.5 billion but were flat sequentially. The decline in sales was bought about by changes made to its VA guarantee product (management fees on HD Lifetime Income Benefit raised by 10 basis points and reduction of the guaranteed accumulation benefit from 6% to 5%) early during the year. These changes made the product less appealing and led to slow growth in sales, compared to the robust pace of the past couple of years.
However, we expect Prudential to gain on its lost market share in 2012 as its closest competitor MetLife has already reduced its minimum return guarantee on GMIB Max to 5.5% from 6% and will further reduce it by 5% by January 2012. This will bring its product attractiveness at par with that of Prudential’s. Moreover, Prudential’s vast independent broker channel for distributing VA is unmatched by its competitors, giving it an added advantage.
Coming back to a broader picture, we believe lower available income in the current faltering economy coupled with a poor employment market could lead to lower demand for the VA products. But over the longer time our growth outlook for VA products is positive as these types of products will become increasingly popular for managing the personal wealth of millions of baby boomers who are about to enter retirement.
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PRUDENTIAL FINL (PRU): Free Stock Analysis Report
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