Total Returns and Standardized and FINRA Non-Standardized Returns take into account subaccount-level expenses, including M&E risk charges, and underlying fund-level expenses. Standardized and FINRA Non-Standardized Returns are also adjusted to reflect front loads, contract charges, and surrender fees.
On the VA fund detail page, you will see both Standardized and Non-Standardized returns. Standardized are displayed as of month- and quarter-end, whereas only monthly FINRA Non-Standardized returns are displayed. Also, Standardized Returns can only be shown for the 1-yr, 5-yr, 10-yr, and Since-Inception periods, and cannot include extended performance data. FINRA Non-standardized returns can be shown for additional time periods and can include EPR data.
Origin
Morningstar calculates Standardized Returns in-house in accordance with Rule 482 under the Securities Act of 1933, which requires quarterly returns for Standardized Returns. When Standardized Returns are listed since the inception date, Morningstar calculates Standardized Returns from the inception date of the separate subaccount rather than from the inception date of the underlying fund.
For the Pros
In calculating standardized returns, front loads are deducted from an assumed initial investment of $1,000. Contract charges are deducted in full at the beginning of each policy year, meaning that the first year's charge is taken out of the initial investment. Surrender charges are deducted at the end of the investment period and vary depending on the time elapsed since the investment start date in accordance with the actual schedule outlined in the variable annuity's prospectus. Additionally, the surrender charge is applied either on the initial investment or the final market value of the variable annuity as outlined in the prospectus.
The ending net-of-fees value of the VA is used to calculate its annualized total returns according to the following formula:
P (1 + T/100)n = ERV
Where:
P = A hypothetical payment of $1,000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value
Let’s try an example. Calculate the standardized returns for the following variable annuity subaccount investment, assuming the following:
Ending AUV = 20
Beginning AUV = 12
Annual contract charge = $30
Surrender charge = 7% of initial investment
N = 1; P = $1000
Step 1: Find the value of the initial investment after deducting the contract charge.
$1000 - $30 = $970
Step 2: Find the number of shares owned after deducting the contract charge.
$970 / 12 = 80.83 shares
Step 3: Find the value of the investment after one year.
80.83 * 20 = 1616.67
Step 4: Find the value of the investment after one year after deducting the surrender fee.
1616.67 (1 - 7 / 100)
Step 5: Solve for T to find the average annual return.
1000 (1 + T / 100)1 = 1503.50
T = 50.35%