VA Sales Took A Nosedive In The First Quarter

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Last May, the first quarter headlines from a VARDS Press Release on variable annuity industry sales read, “Variable Annuity Sales and Assets Reach All-Time Record.” First quarter 2000 total premium flow had hit $36.5 billion, eclipsing 1999s first quarter premium by 36%.

What a difference a year makes! Not since the 1994/1995 period have we witnessed such a significant annual first-quarter-to-first-quarter decline in premium flow. During the 94/95 period, sales declined 23.8%. First quarter 2001 total premium flow of $28 billion is 23.3% lower than first quarter 2000s $36.5 billion.

Internal exchanges in 2000 were 6.73% of total premium flow. First quarter 2001 internals came in at 4.72% of total premium flow. Internal exchanges are a new component of the VARDS premium flow statistics begun last year.

Of the first quarters top 25 VA issuers, only 5 (20%) had sales ratios of 25% or higher. For all VA issuers during this calendar quarter, 19% had first quarter sales ratios of 25% or higher. These sales results show a significant decline when contrasted to first quarter 2000s statistic where 71% of all VA issuers in that period had sales ratios of 25% or higher.

Total net assets of $878.8 billion declined 9.6% from year-end 2000s total net assets of $972.6 billion. First quarter 2001 assets are 15.8% lower than industry assets from first quarter 2000. Every issuer in the top 25 had negative asset growth in first quarter 2001, with percentage changes ranging from -6.8% to -15.4%. As noted in our previous commentary (see NU, March 12), last quarters (year-end 2000) asset decline of 1.6% was the first time in the past decade that we have witnessed negative asset growth industrywide.

It was further noted that, “What makes this decline stand out is its stark contrast to the fact that the average annualized asset rate of growth from 1991 to 1999 has been 24% per year.”

Negative investor sentiment continued into the first quarter in the wake of last years market performance. Coming off last years 39.3% loss for the NASDAQ, this index lost 25.5% for the first quarter. The S&P 500 lost 11.8%, followed by a Dow Jones Industrials loss of 8.4%.

The VARDS Market Average for all Equity Funds lost 13.9%, while all Fixed Income Funds found positive territory, posting a modest 2.4% return. Aggressive Growth Funds for the VA universe lost 22.5%, while Growth and Income Funds fared somewhat better, trimming their market loss for the quarter to 9%.

During the month of April, the equity market averages posted a positive return, with the NASDAQ up 15%. The Dow Jones Industrials were up 8.7%, and the S&P 500 posted a 7.7% return. While these returns were positive, it will take a number of months of positive returns to significantly influence overall investor sentiment to the upside.

We estimate VA industry sales for the month of April at $8.8 billion, a figure that is 5.7% below first quarters average monthly sales of $9.3 billion. At this point in the year, we would estimate 2001s total VA industry premium flow to come in between $108 billion to $112 billion. At the high end of this prognostication, 2001s VA sales would post an 18.5% decline for the year. The last time the VA industry posted an annual decline was 1988, following the market crash of October 1987.

Market share of VA sales by distribution channel for the first quarter found the Captive Agency channel rising to 37%, a 3% increase over 2000 and a 6% increase over 1999. We would attribute the majority of this recent rise more to a loss of active sales in the Independent Broker-Dealer channels than to an active increase of sales by the Captive Agency channel, especially in light of the downward trend in the number of Agency channel employees.

Other changes in distribution from year-end 2000 were as follows: Bank/Credit Union lost 1%, coming in at 11%; Direct Response lost 1%, declining to a 2% share; Independent NASD Firms lost 2%, posting a share of 25%; New York Wirehouses stayed constant at 12%; and Regional Firms gained 1%, rising to 13% of total VA industry premium flow.

While total premium flow was down for the first quarter of 2001, the top 10 and 25 VA issuers market share consolidated to the upside. The top 10 issuers share rose 2.9% to 54.8%. The top 25 rose 1.6% to a market share of total premium flow of 90.1%. The top 50 rose 0.5% to close out their market share at 99.7%.

With Sun Lifes purchase of Keyport, Hartfords purchase of Fortis business, and AIGs purchase of American General, the consolidation wave is on the move as issuers take advantage of economies of scale to assure profitability and market presence.

Out of the top 25 VA contracts this calendar quarter, 6 (24%) had sales ratios of 25% or higher. These contracts, in order of sales rank, include TIAA-CREFs Retirement Annuity (25.3%); Lincoln Nationals Multi Fund (26.6%); Aetnas Multiple Sponsored Retirement Options (26.1%); Kemper Investors Destinations (45.2%); Sun Lifes MFS Regatta Choice (50.9%); and Hartfords Leaders (33.2%).

The current downturn in the market certainly has provided a real life simulator in which to test the concepts inherent in some of todays newer special contract features, such as enhanced earnings benefits. Monitoring contract owner feature utilization is essential to validate acceptance of the premise supporting their deployment in the newer contracts. These features represent the true essence behind insuring for a future loss.

The success of new special contract features now available in many of the top 25 contracts, as well as the majority in the industry today, illustrates the opportunities available through concentrated client marketing and effective wholesaling efforts. One year ago, 28% of all VA contracts had unbundled or ascribed contract special features. Today that figure has doubled.

We thought it would be illustrative to compare the current top 25 VA contracts to the overall VARDS universe in a few key comparative areas to see if these contracts held any features or benefits in common which might set them apart.

In the area of fees, the top 25 matched up closely with the overall universe. The average mortality and expense fee of the top 25 contracts is 1.13%, while the overall universe comparative is only slightly higher at 1.15%. The same holds true for average fund management fees of 0.64% for the top 25 versus 0.63% for the universe. Eighty-five percent of the top 25 contracts are multi-manager, as are 85% of the total universe. The top 25 part company with the overall universe in the average number of funds available in a contract. For the universe, the average VA contract has 32 subaccounts available, while a top 25 contract jumps by 25% to a total of to 40 investment funds.

In the area of overall contract subaccount investment performance as measured by the VARDS Profiler Overall Contract Ranking System, we found that the top 25 average matched up closely with the overall universe, with no overall investment performance advantage going to the top 25.

From a sales distribution perspective, 11% the top 25s sales were attributed to the Bank/Credit Union channel versus 16% for our universe excluding the sales volume of the top 25 from the overall universe. Due to the fact that the top 25 is home to some of the nations most successful Captive Agent 403(b) products, this distribution channel market share is at 31% versus 25% for the universe. Direct Response is at 4% versus 2%. Independent NASD is at 29% versus 27%, while New York Wirehouse is 11% versus 13%. The top 25 sells 14% of its volume through Regional Firms as compared to 17% for the universe excluding the top 25.

As we noted in the year-end 2000 article, “The present and future challenge is to bring in millions of new first-time buyers.” Todays real life market environment gives the industry the opportunity to tout its message of the VAs unique market environment features and benefits. This environment truly tests the commitment and effectiveness of sales forces behind VA product marketing.

The path of least resistance to a concerned and/or disgruntled investor might be a fixed rate instrument. Selling the VA is certainly another story, not being as easy a sale in a down market. Perhaps agent compensation should be tied to up-and-down markets. A bonus or higher commission might be paid in a down market to sell a product that may ultimately be better for a client, but riskier for the sales agent. Perhaps part of the rise in the Captive Agency group distribution channel is tied to a greater commitment to sell the “home office” product in every type of market.

Despite the market losses and the declining sales revenue of the past six months, there are both individual and corporate/product success stories out there. Savvy marketing groups are already capitalizing on them and need to expand and extend their successes. The lessons the industry learns today will make it stronger going into the future and enhance its services in all market environments.

, executive vice president of Info-One, is editor and publisher of Marietta, Ga.-based The VARDS Report, an Info-One Service, which publishes variable annuity statistics.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 4, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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