During the 3rd quarter of 2004, DSG completed our annual study of the variable payout annuity industry, based on a survey among industry participants as well as a series of in-depth executive interviews. The primary objective of this research was to examine industry activity, results, and trends among firms that offer immediate variable annuities (IVAs), as well as those who offer deferred variable annuities which can be converted into annuity payouts.

Over the past two years, this study has been expanded to provide additional focus (via the executive interviews) on achieving a better understanding of the retirement income management opportunity, with all its issues and challenges.

Sponsors of this project received an in-depth analysis and report. This article presents an overview of selected key findings from the survey, as well as insights from the executive interviews.

The Market for Payout Annuities
As of mid-2004, there were 17 firms providing stand-alone IVA products to the marketplace, and 5 firms offering "IVA Substitute" products. (A company is said to be offering an IVA Substitute when it is actively and purposely promoting a deferred variable annuity product, with a specific focus on its payout provisions, as a substitute or alternative for an IVA).

Total industry sales of IVAs for 2003 have declined for the second year in a row, amounting to a little over $500 million. IVA Substitute sales totaled about half of that amount, bringing the total of both to approximately $800 million in 2003. The average IVA product sale in 2003 was $114,000 per contract, and IVA Substitutes averaged slightly less than this amount.

Though the total IVA sales dropped in 2003, not all companies experienced a decline in their IVA business. In fact, 10 out of the 17 IVA companies actually increased sales during that period.

Product Design
There have been few changes in variable payout annuity product features over the past two years. Out of 16 IVA firms that provided product information, 14 now offer some form of commutation option, and about half of these companies offer a "floor" on monthly income payments. There are now three firms (2 IVA; 1 IVA Substitute) that have a product that can pay commissions on the income stream.

Marketing Plans
In just the past year, a number of companies have increased their focus on the retirement income market. In our survey, for example, 61% of variable annuity providers indicated that they have recently expanded their retirement income activities, with 8 of those firms indicating they have made a "major commitment" to this effort.

Executive Interviews
Interviews were conducted with a dozen executives at companies that are active participants in the variable payout annuity market. The interviews addressed corporate strategies, competitive challenges, and expectations for the future.

Selected findings include:

• Most companies continue to use product-focused strategies as their response to a need for retirement income solutions. However, we are beginning to see a few companies enter the market with a product initiative, and then evolve to a more holistic, needs-based income planning strategy.
• Although these companies did not achieve significant growth in their variable payout annuity business in 2003, many of them continue to be upbeat about the future potential of these products.
• Companies are about equally split in their opinions of when the retirement income market will fully materialize. They either believe that the opportunity is here already (or on the brink), or they believe it will reach fruition gradually, as Boomers retire over the next 5 to 10 years.
• A few, well-noticed, industry leaders are committing substantial resources today to implement their retirement income strategies. Not only are they firmly establishing their competitive advantage, but they may also be raising awareness of the issues, which could be beneficial for the industry in general.

Summary
As a growing number of retirees face their need for retirement income management advice and solutions, this causes most firms in the variable payout annuity business to be optimistic about the future of their business, despite recent market setbacks. The evolution toward a broader "retirement income solution" rather than a single product approach continues to be the trend, and some companies are already beginning to provide such solutions.

A number of companies are actively building awareness of important retirement issues (among advisors/reps as well as consumers) and applying substantial resources to developing and providing practical solutions. These firms are wellpositioned to benefit from the retirement income market opportunity, and become leaders in the transition from a market based on retirement savings to one based on optimizing retirement income and other post-retirement decisions. DSG

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