In yet another sign of variable annuity capacity constraints, Jackson National recently announced that they are approaching the upper range for 2012 sales of variable annuities with guaranteed living benefits.

Jackson’s November 8 press release indicates the company has roughly $1 billion worth of remaining 2012 capacity.

Jackson indicated that this remaining capacity will be used for new product sales and that they will no longer accept new 1035 exchange business or qualified transfers of of assets for variable annuities with GLBs as of November 13 2012.

Advisor Perspectives just published the first in a series of articles from Wade Pfau. These pieces are important and should be read by anyone considering guaranteed lifetime withdrawal benefits or any of the other optional guaranteed living benefit features that accompany variable annuities.

Conventional financial wisdom says that bonds should comprise an increasing percentage of a portfolio as the owner ages and heads into retirement.

In theory, a retiree’s need for income and a reduced tolerance for risk are the main drivers of the larger allocation to bonds.

A key consideration, though, is whether bonds are the best or “optimal” way to address lifetime income needs and the reduced appetite for volatility.

Retirement researcher Wade Pfau published a research paper titled “An Efficient Frontier for Retirement Income.”

Pfau’s paper analyzes the relative merits of equities, bonds, fixed single premium immediate annuities (SPIA), inflation-adjusted SPIAs and variable annuities with guaranteed lifetime withdrawal benefits (GLWB).

Each of these allocation options are examined in the context of achieving retirement spending goals.

Pfau creates an efficient frontier for a hypothetical 65 year old couple requiring a 4 percent withdrawal rate.

The U.S. longevity insurance market has been developing for almost a decade, and yet there are still only a handful of insurance companies providing retail longevity annuities.

This is somewhat surprising given demographics, longevity trends, capital market conditions and recent regulatory guidance that should provide a boost to longevity annuities.

The concept is seductive: a financial product that provides upside exposure in the event that equity markets trend up and to the right while also providing a floor of protection in case the bottom falls-out from under markets again.

Sort of like having your cake and eating it too. Very tempting in light of the massive financial uncertainty that has existed for the past several years.

The variable annuity industry in the U.S. is highly concentrated.  Ten insurance companies generate roughly 80 percent of industry revenue, and the top 20 companies generate over 90 percent of total sales.

A meaningful signal is sent when five of the top 20 variable annuity companies announce that they are either exiting the business entirely or paring-back existing product lines.

This is exactly what has taken place over the past several months with the following companies dialing down their variable annuity exposure or pulling-out entirely:

Despite a barrage of negative press, it appears that SunAmerica’s measured approach to the variable annuity business is demonstrating that the successful production of variable annuities is similar to most other lines of insurance.

The Hartford’s recent decision to exit the variable annuity business entirely is attributable in part to their management’s (under significant shareholder pressure) view that the VA business is capital intensive and has relatively unattractive economics compared to certain property and casualty lines.

The term de-risk has been appearing frequently in recent financial news. 

General Motors’ recent decision to offer lump-sum pension buy-outs to 42,000 retirees is an attempt to reduce the company’s pension obligations with the hope of returning GM to investment grade status in the eyes of rating agencies. 

Mark J. Warshawsky is Director of Retirement Research at Towers Watson.

Dr. Warshawsky served as assistant secretary for economic policy at the U.S. Treasury Department from 2004-2006 and he has held senior level economic research positions at the Federal Reserve Board, the Internal Revenue Service and TIAA-CREF.