Variable annuities (VA), once a retirement-product star, reported a big jump in second-quarter assets, according to the Insured Retirement Institute (formerly called NAVA ). However, the investment holdings of VA contracts reflect a big percentage drop for equities and corresponding increases in holdings of more conservative investments.
[See 4 Expert Annuity Tips for Income Seekers.] Net assets in VA accounts were $1.19 trillion as of June 30, up 11 percent from the end of the first quarter. Total VA sales also recovered to $31.8 billion during the second quarter, up from $30.4 billion in the first three months of 2009. Net sales, which reflect money moving into new VA products, rose to $6.1 billion from $5.1 billion.
Despite the solid quarter, it's clear that investors are still cautious about committing to new VAs. The industry still trails the recent market peaks it reached in the third quarter of 2007, when net assets hit $1.49 trillion. Quarterly total sales of VAs peaked at $47.8 billion in the fourth quarter of that year, while net sales hit their recent high in 2007's third quarter, when they totaled $9.4 billion.
Sales of qualified VAs generated all of the industry's improvement and totaled nearly 75 percent of total sales in this year's second quarter. Sales of non-qualified VAs continued to slide from their 2007 highs, and reached only $8 billion in the second quarter, down from their recent peak of $18.6 billion in the last three months of 2007, when they totaled nearly 39 percent of total VA sales.
VA holdings also reflect a more conservative mix of investments. About 45 percent of VA net assets were in equities as of June 30, compared with nearly 61 percent two years' earlier. Fixed income, bond and money market holdings rose to nearly 41 percent of VA net assets, up from about 28 percent in mid-2007. Assets held in balanced VA accounts rose to 13.7 percent last June from 11 percent as of June 30, 2007.
Annuities permit the tax-free accumulation of investment gains until money is withdrawn. Annuities purchased as part of a qualified retirement plan may be funded with tax-exempt dollars, while non-qualified annuities don't enjoy tax benefits on initial investments. VAs—often called mutual funds with an insurance wrapper—usually include families of mutual funds and permit owners to control investment decisions. They also usually include various insurance guarantees protecting initial investments and, in some cases, promise certain minimum returns. Many VAs charge steep withdrawal fees if owners cancel their contracts within the first several years of their creation.