UITs Make Foray into Variable Annuities
June 14, 1999
At least three variable annuity providers will soon be offering other sub-account investment options besides mutual funds.
Nike Securities of Lisle, Ill. through its First Trust investment product division has reached deals with three major insurance companies to manage look alike versions of its highly popular unit investment trusts.
Both Jackson National Life of Lansing, Mich., and American Skandia Assurance Corp. of Shelton, Conn., have registered defined portfolios for use with their variable annuities and both firms are awaiting SEC approval to begin offering them. The Ohio National Life Insurance Company of Cincinnati, Oh., also plans to introduce a Target 5 Unit Investment Trust - including five of the Dow 30 stocks - in September. Ohio National has been offering Nike's Dow 10 UIT with its ONcore variable annuities since January. Ohio National, American Skandia and Jackson National are joining a few pioneers who are already offering similar products.
Unit investment trusts (UITs) are investment companies that buy and hold a designated basketful of equity or fixed-income securities for a defined period of time, usually one or two years for equity UITs and 15 years or longer for fixed-income UITs. Unlike mutual funds, UIT portfolio securities are bought and held for the entire duration of the specific UIT. At maturity, the UIT sponsor can offer a revised UIT by reshuffling the portfolio holdings. Investors can roll over their assets into the reconstituted UIT or choose to liquidate.
This past January, Nike joined with Ohio National Life Insurance Company to offer its popular unit investment trust, the Dow 10, as an investment option under its ONcore Series of variable annuities. The ONcore variable annuities are distributed through Ohio National as well as through banks and broker/dealers. Nike is the adviser to the investment sub-account.
"We needed an edge, a niche," said Thomas Barefield, senior vice president of institutional sales at Ohio National. Ohio National manages $1.4 billion in its variable annuities.
Brokers had been telling Ohio National they were interested in using UITs, Barefield said. But no one was sure how to pair the very popular investment option with the complex, tax-deferred structure of variable annuities. Nike's general counsel, Scott Jardine, figured out how and Nike began talking with insurance companies, said Nike senior vice president Jeff Simpson.
"Brokers kept saying they loved UITs and investments in concentrated portfolios," said Simpson. "But they wanted the ability to defer taxes."
Outside of variable annuities, when UITs mature and portfolios are liquidated, investors face a taxable event, said Simpson. Under the new variable annuity UIT concept, the same UIT investment methodology is employed, but there is no taxable event because the rollover occurs in a tax-free vehicle. Rollovers into revised portfolios are automatic.
Over the past few years, increasingly novel UITs have been brought to market and have attracted assets. Mutual fund advisers have been watching increasing assets flowing into UITs, which have largely come to be known as defined or focused portfolios. Some fund companies are concerned that such defined portfolios are siphoning off assets that otherwise would go into mutual funds.
In 1995, unit investment trusts took in $11.3 billion, according to the Investment Company Institute of Washington, D.C. In 1996, that figure more than doubled to $24.0 billion. In 1997, defined portfolios attracted $38.5 billion, and in 1998, new cash flows into focused portfolio products reached $61.8 billion. Assets flowing into UITs grew 60 percent between 1997 and 1998 at a time when overall mutual fund assets (not including new assets into money market funds) fell about 12 percent. Net new cash flows into focused portfolios through April of 1999 were $19.6 billion, suggesting that asset inflows so far this year are keeping pace with last year.
There is no question defined portfolios are hot, said Ben Fulton, vice president of new product development and defined portfolios at John Nuveen & Company in Chicago. Though Fulton declined to give exact asset inflows, Nuveen has seen assets going into its defined portfolios balloon.
"Defined portfolios are maturing to the next level," he said. "They're not just a niche tool. They are a key tool brokers and clients will look at."
Three variable annuity providers - SunAmerica, Integrity Life and Pacific Life - have been offering limited UIT-look-alike investment options, according to Barefield of Ohio National.
But interest among other insurers is growing. Jackson National Life has enlisted Nike to help it develop a new offering, the Jackson National Life Defined Strategies Variable Annuity, which, pending regulatory approval, will be introduced in July.
American Skandia also has in registration what it is calling First Defined Portfolio Fund which includes a dozen of Nike's defined portfolios, including the 10 Uncommon Values Portfolio, and the Dow Jones Internet Index Portfolio.