It's counterintuitive — wealth managers are ratcheting up the price and providing lower returns on variable annuities.

Some providers have doubled prices in the past six months, and more changes are expected.

Steve Mabry, a senior vice president of annuity product development for Axa Equitable, said the New York company repriced its variable annuity with a living benefit guarantee in November and again in February. "These products are dependent on the interest rate environment," Mabry said in an interview last week. "Based on the low interest rate condition and the high volatility in the equity markets, we felt it was prudent to make an adjustment."

In February, Axa Equitable lowered the roll-up to 5% from 6% and raised fees by 5 basis points, to 85 basis points. In November the Axa Group unit had lowered the roll-up rate to 6% from 6.5% and raised fees 25 basis points, to 80 basis points. (A roll-up is a guaranteed minimum rate of return on an investment.)

Analysts said most providers are making such changes even though sales of variable annuities fell 15% last year, to $151.63 billion, according to Morningstar Inc.

Kenneth Kehrer, the director of Kehrer-Limra in Princeton, N.J., said many have shifted to fixed annuities, which had their second-best year for new sales in 2008.

"We need to remember that buying a variable annuity is just a different way of buying mutual funds," he said. "Annuities allow you to hedge your bets and get downside risk protection. Variable annuities have suffered, but they have held up much better than mutual fund sales."

According to Morningstar, 18 of the top 20 variable annuity providers in the United States, which control 94.4% of the market, had poorer sales in 2008 than in 2007.

Hartford Financial Services Group Inc. has also started to make changes to its variable annuity lineup, including raising fees last month.

John Walters, the president and chief operating officer at Hartford Life, said during the Connecticut company's fourth-quarter earnings conference call in February that it had "resized its wholesale force on the variable annuity side."

"And while we are pleased with that, I think that, at current sales levels, we are going to have to continue to manage our expenses aggressively and we are making product changes as we have described, both increases in the fees on our product … and then other product changes that we are considering for May," he said.

"As we roll those out and assess the competitive environment, if we need to make additional changes to the expense structure, we are prepared to do that, and we are going to view that in a very fluid market as we go forward," he said.

Hartford's sales fell 40.3% in 2008 to $7.9 billion, Morningstar said.

Kehrer said providers were forced to raise prices. "These companies are worried that this down market might last a lot longer and they had to reprice their products because they were not charging enough for the benefits that they were providing," he said.

More repricing will occur over the next couple of months, but people will continue to invest in variable annuities, Kehrer said. "Investors and advisers know how valuable these benefits are," he said. "I mean, if you bought a VA two years ago, you were automatically guaranteed to get growth when everyone else was falling."

He said some of the repricing "could be substantial" — in some cases providers could double prices. "My guess is that it won't have that big of any impact on sales, because experienced investors know that this was a great deal to begin with and having this guarantee during a difficult market cycle is still a huge benefit," he said. "If it was a great deal, it is still a pretty good deal."

Mabry, who oversees design of new annuity products and features at Axa Equitable, said the company's variable annuities continue to draw strong interest from investors.

"People believe in equities. They believe that they will recover," he said. "They don't know when the recovery will occur, and variable annuities give them an opportunity to invest in equities with some downside protection."

According to Morningstar, Axa Equitable ranked third in variable annuity sales last year, with $13.3 billion. But that was a 13.96% decline from 2007.

Mabry said he expects more providers to tweak their products.

"With any product that offers a guarantee, there is a lot of sensitivity to market conditions," he said. "We just have to be prudent in order to continue to be a leader in risk management products. … Based on market conditions, companies will change and adjust the benefits that they can offer to reflect the market environment, and they will alter costs to reflect what it costs to manage risks."

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