John Hancock Financial Services says it hopes to broaden the appeal of variable annuities by making them less like the complicated insurance products they've been and more like mutual funds.

Hancock's effort comes as many insurance companies have been raising prices on and adding restrictions to their variable annuity offerings.

"We are literally trying to create a new space here," said Tom Mullen, the chief marketing officer for John Hancock variable annuities, adding that the company's new product is being positioned to compete against mutual funds.

On June 1, the Boston unit of Toronto's Manulife Financial Corp. introduced AnnuityNote, a variable annuity that features one underlying fund-of-funds portfolio, compared with the dozens of mutual fund choices available with many variable annuities.

AnnuityNote also features a built-in lifetime income benefit and a relatively low, "all-in" cost of 1.74% that covers the product's insurance fee and portfolio expenses.

The product uses a simple "A-share" structure and is sold with a 3% up-front commission.

For several years, insurers have increasingly sweetened their guarantees and other product features as they competed to meet the growing demand for variable annuities. But the companies got caught between their generous income guarantees and the market crash, raising concerns that losses on the annuities' underlying investments would prevent the insurers from honoring their guarantees.

Hancock itself has retooled its existing variable annuity and the accompanying riders. This year it moved its "step-ups" from quarterly to annual, and it raised the price of the guaranteed income rider. It also dropped its L and C shares and discontinued its bonus annuities. The three products were its most expensive in the category, Mullen said.

Ernst & Young has reported that the top 20 variable annuity writers made significant changes in their products just between December and February.

Half stopped selling at least one of their products; 90% changed their living benefits; 85% raised fees on at least one product; 40% reduced benefits and 10% introduced a new living benefit.

Several companies have stopped offering living benefits altogether, according to Gerry Murtagh, the variable annuity spokeswoman at Ernst & Young.

What's more, many annuity writers have changed their investment options to restrict their number or to make them more conservative, she said.

Murtagh said low interest rates, high market volatility, higher hedging costs and the limited availability of reinsurance have motivated the changes.

Having scaled back the risk in their variable annuities, several insurers are considered likely to introduce simplified products in coming months, she added.

Rather than being a retooled product, AnnuityNote is a new one, designed to "get in front of that 80% of the market that typically does not use our products," Mullen said.

Once the company had identified high prices and myriad product options as barriers to variable annuity adoption — both by advisers and investors — it "attacked cost and complexity," he said.

As a result, its benefits are "less generous but also less complex," he said.

The minimum initial investment for an AnnuityNote is $25,000, and its retirement income value is calculated on the fifth anniversary of the contract date. The lifetime guaranteed annual income is designed to equal 5% of the initial amount an investor paid for the annuity. If market performance lifts the product's value, the lifetime income amount is based on the contract's value at the five-year mark.

And unlike Hancock's core variable annuity, which has more than 40 underlying funds to choose from, AnnuityNote has a single fund of index funds balanced across asset types.

One advantage of the single fund is that it lets the company more easily hedge against its risk, Mullen said.

AnnuityNote is a rival to mutual funds, he added.

A year ago, it would not have been wise to compete against mutual funds, he said. But the market crash has left many clients a year closer to retirement and further from their goals, he said.

The door has also been opened for a competing product because of the disappointing performance of many target date funds.

According to the research firm Lipper, the average 2010 fund lost almost 25% of its value last year, despite the products' supposedly conservative mandates.

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