In a world that has seen more and more hurried announcements of product closures, Prudential Financial made a quick announcement at the end of August that it was stopping future contributions to it’s Highest Daily Daily Lifetime 5, Six Plus, Seven, and Seven Plus contracts.
Advisors have scrambled to slide money into effected contracts that will no longer accept future contributions (Prudential did not state this was a permanent move, so there’s always hope this freeze will be turned around) to these variable annuity contracts.
What’s even more interesting is the time line under which this all took place. According to Investment News, Prudential dropped the bombshell just days before Labor day, that it would no longer accept contributions after August 31st. This has cause a good supply of frustration among advisors who were targeting Pru’s annuities as a landing zone for client money.
The official announcement was made by a letter to advisors and business partners who worked with Prudential, and many are criticizing the arrival of the notice. Some advisors noted that their notice on the closure arrived just a day or two prior to the end of the August.
Many of us remember Prudential’s roll out for HD7. The product contained a somewhat nasty gotcha by way of an algorithm that sought to protect client money by reallocating funds in a fixed bucket in the event of a declining account value. The 2008 stock market crash kicked this algorithm’s function into hyper-drive and we all learned that once in the fixed bucket, it wasn’t so easy to get back out. No worries said many advisors, because the annuity’s guarantee was still in play (a compounded 7% at the highest daily watermark on the account value over a 10 year period).
Prudential Financial is not a smaller provider of annuity business in the United States. In fact, National Underwriter released the numbers this month in their Top 100 rankings, and Pru ranks number two in the United States for net premiums written for individual annuities and number three for group annuities.
While Prudential certainly has a varied focus, I’d be comfortable making the case that annuities are one of their biggest, and if they are pulling back like this, it can’t spell good things for the industry (specifically the variable annuity industry).
Why is this Happening?
While I don’t profess to be the all knowing wizard, I’m guessing average general account investments have a lot to do with this. The industry is averaging under 5% annual returns on general account assets at the moment. This is very unusual territory for an industry that has enjoyed a 9% average over the last 30 years.
In other words, it’s hard to guarantee five, six, or seven percent when you yourself are having a tough time breaking 5%. Prudential itself has been in the 5.5% territory for the past 5 years, which is by no means a bad result.
This is an area where low interest rate lamenting can certainly gain credibility.
We’ll be sure to update you with any additional information that comes about concerning Prudential Financial’s decision to refuse future contributions to several of its most popular variable annuity products.