VA Sales In First 6 Months Are Less Than Half Of Last Year’s Total
While year-to-date variable annuity sales continue to remain below last years level, second quarter sales of $29.3 billion showed the first quarterly rise in a year. Mid-year total premium flow of $57.7 billion is 42% of last years $138 billion in sales volume.
Second quarter VA assets grew 3.5% to $910 billion, yet remain 6.5% below year-end 2000 VA assets of $972.7 billion.
As of mid-year, only 6 (24%) of the Top 25 VA contracts had sales ratios of 50% or higher, as compared to last years total sales. Of the top 25 VA issuers, only 3 (13%) had sales ratios that hit the 50% mark.
While we have ranked the Top 25 VA issuers by total premium flow (including internal exchanges), we have also provided rankings by new sales. New sales exclude VA-to-VA internal exchanges, but include external exchanges and internal exchanges from fixed annuities.
Second quarter internal exchanges rose slightly to 6% as compared to last quarters rate of 4.7%. Internal exchanges in 2000 were 6.7% of total premium flow. As noted in last quarters commentary, internal exchange programs have become a key component of essential asset retention activities. (See NU, June 4.)
Perhaps the biggest news item of the second quarter was John Hancocks rise into the industrys Top 25 VA issuers. Formerly ranked 29th, Hancock rose to 19th on year-to-date total premium flow of $1.27 billion. Of that total, $924 million (74%) was from a recently begun Safe Harbor internal exchange program. The program began in April, and as equity analysts have noted, has diverted attention from new sales.
Hancock has identified $2 billion of existing in-force contracts for which the Safe Harbor exchange program is available. Under the Safe Harbor provisions, contract owners exchange conditions are fully disclosed.
For many contract owners holding older products like Independence and Independence Preferred, exchange to the newer Revolution Value VA contract has obviously been a popular choice. The Revolution Value VA contract ranked 7th in the Top 25 VA contracts for the period ending June 30, 2001. Of the products $1.1 billion in total premium flow, $935 million was from internal exchanges.
The decision to offer such programs (which do hold risks for insurers) represents difficult near-term choices for public companies. The trade-off between growth and earnings per share versus the long-term stability of asset retention is a double-edged sword. In the end the market will be the final arbiter, yet doing what is in the best interests of ones clients should always be the right thing to do.
For the first time in as many years as I can remember, quarterly market share of VA sales by distribution channel did not change. The captive agency channel, which had risen three basis points last quarter, remained constant at 37%. Independent NASD firms, the second largest category by distribution channel, stayed at 25%, while regional and New York wirehouses stayed at 13% and 12%, respectively. Having each lost a point last quarter, bank/credit union and direct response remained at their respective shares of 11% and 2%.
Investor sentiment turned positive through the second quarter, as the NASDAQ OTC composite posted a 17.4% return. The year-to-date return for the tech-dominated index is negative 12.5%, while the one-year performance return comes in at negative 45.5% for the second quarter.
The Dow Jones Industrial Average and the S&P 500 with dividends reinvested posted more modest gains of 6.3% and 5.9%, respectively. Overall, year-to-date and one-year returns on the Dow and S&P 500 are considerably better than the NASDAQs. For the Dow, the returns are negative 2.6% year-to-date and positive 0.5% for the past 12 months as of June 30, 2001. For the same time periods, the S&P 500 posted negative returns of 6.7% and 14.8%, respectively.
For the time being, the markets appear to have discounted the modest tax plan refund checks and the historic Federal Reserve rate-cutting schedule (seven in six months) totaling 300 basis points. While it is widely anticipated that the Fed will continue cutting rates, the jury is still out on the overall effects these historic rate cuts will have on consumers.
Many market analysts and economists who had been calling for the beginnings of a solid rebound in the third and fourth quarters are now talking about “when” next year.
While we continue to see a steady stream of disappointing news, from massive layoffs to plunging profits and markets, two statistics stand out in my mind as most significant in our attempts to gauge the future of the markets. First, the national savings rate came in at an annualized rate of 1.1% in July. This recently announced statistic seemed to come as a relief to data collectors who stated in the Aug. 1, 2001, issue of Investors Business Daily that “Revisions to earlier reports show savings never fell below zero.”
Second, consumer debt since 1996 has reached an all-time high. Couple this rising debt load with a significant jump in unemployment since late last year, and as analysts state, you have the financial equivalent of drinking and driving. Total consumer debt is up 25% in the last 36 months, with credit card debt up 30% in the same period. The good news is that consumers strung out on debt eventually think about raising their savings rates.
With VA net sales at historically low levels, there couldnt be a better time for the average American who does not own a variable annuity to get up to speed on the concept of the annuity and annuitization. The fear of outliving ones income is real, but to most it is something to be put off until tomorrow.
The flight to safety and stability has been clearly marked by the mid-year statistics. Of the 19 broad-based investment objectives tracked by Info-One/VARDS, 10 had a negative year-to-date change in assets and 9 were positive.
With the exception of a minor positive change in assets for the balanced/income category, the remaining 8 investment objective categories with positive asset growth were all corporate bond/treasury fund groups, along with general interest accounts and money market funds.
The biggest positive dollar change in year-to-date assets came in general interest accounts with a $6.2 billion increase, up 3.4%. Money market assets scored the highest positive percentage change, increasing $3.8 billion, or 12.4%. Corporate bond general accounts rose 14.3% on $2.1 billion in asset growth. Corporate bond high quality followed with a 17%, $1.6 billion increase.
On the equity side, as expected, growth and income funds (the single largest investment objective category) lost $18.9 billion, down 7.7% from year-end 2000 assets of $245 billion. Growth funds (the second largest overall investment objective category) lost $21 billion, down 10.4% in the year-to-date period. International stock and aggressive growth funds have percentage losses of 14.6% and 15.2%, respectively.
As noted above, total VA industry assets of $910 billion are down 6.5% from year-end 2000. Out of our Top 25 VA issuers ranked by assets under management, only one, Pacific Life, had a positive percentage change from year-end 2000. Pacific Life stood alone at a positive 2.8%. Allmerica Financial ranked second with the lowest negative change in assets at -2.25%.
As noted in our quarterly VA Issuer Growth Rate Benchmark of Total Contract Assets, the average asset loss for the 11 companies in the first asset class (each with assets of over $21 billion) for the period ending June 30th was -6.96%.
In the second asset class, the average mid-year loss on assets was -6.42%. In the third class, the average loss on assets was -3.22%. Both Pacific Life and Allmerica belong to this asset class. As noted in our year-end 2000 commentary, 2000s asset decline industrywide of -1.6% was the first time of the past decade that the industry has ever witnessed a negative growth rate. It was also noted that the average annualized rate of growth on VA assets for the period 1991 through 1999 was 24% per year.
While last year was the first to break a decade-long asset growth record of back-to-back increases, 2001 will be the first to break a 12-year run on back-to-back increases in sales. While second quarter increases are a good sign, third and fourth quarter premium flows would have to grow by an average of 38% and hit $40 billion each quarter to break even with last year. The good news at the mid-year point is that our earlier projection of $112 billion for total 2001 VA sales should be a little low. We could optimistically hope for a few billion higher.
The good news for all of us in todays marketplace is the hope that U.S. consumers will begin to think positively about raising their savings rate and lowering their debt load. The retirement savings vehicle found in todays variable products is positioned well to assist consumers in their efforts.
, 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, September 10, 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.