9-Month Variable Annuity Sales Off 20% From Last Year

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For the variable annuity industry, with its paths so closely tied to the state of equities markets, the news of the 19-month bear market remains a familiar story. Market weakness–firmly entrenched before the week of Sept. 10–continued to a historic record decline following the markets reopening after the Sept. 11 terrorist attacks. The week of Sept. 17 was the Dow’s worst since 1933off 14.3% on a record 10.5 billion shares.

For the year-to-date period ending Sept. 28, the Dow was down 18%; the NASDAQ was down 39.3%; and the S&P 500 was down 21.2%. The IBD Mutual Fund Index was down 32%.

Third quarter year-to-date VA industry total premium flow of $84.8 billion, a figure 20.5% below sales this time a year ago, continues to reflect the entrenchment of todays investor-consumer. New sales (total sales less internal exchanges) fared slightly better on a comparative percentage basis, $79.8 billion versus $99.1 billion, down 19.5%. Third quarter year-to-date sales are 61.7% of last years total premium flow of $137.4 billion.

Beginning with this quarterly article, both issuer and contract listings have been ranked by “new sales.” Readers are reminded that “new sales” mean new money coming into a contract/issuer that can include external 1035 exchanges, but not internal VA to VA exchanges.

Year-to-date third quarter internal exchanges were 5.9%, down from year-end 2000s rate of 6.7%.

Year-to-date total VA assets of $813.2 billion are down 15% from year-end 2000s total net assets of $956.5 billion. October gave investors their first positive month of market returns since last springs rally. For the DJIA, the third quarter year-to-date loss was trimmed by 2.1%. The NASDAQ and S&P 500 trimmed their third quarter year-to-date losses by 7.7% and 1.5%, respectively. The NASDAQs return in October, in the face of the Sept. 11 tragedy and worsening economic news, was impressive and reflects the pent-up buying potential waiting to be unleashed.

]As a leading indicator, historically the stock market begins to recover six to nine months ahead of the economy. Conversely, unemployment numbers and consumer confidence surveys are lagging indicators, as negative sentiment and layoffs come after the economy has already worsened.

With short-term interest rates at a 40-year low in the wake of the 10th Fed funds rate cut this year, the pumps are heavily primed for what many economists and market watchers feel will be an impressive recovery in the second half of next year.

The biggest pump-priming stimulus came on Oct. 31, when the Treasury Department moved to eliminate the 30-year long-term bond. The path is now clear for lower long-term interest rates, and home buyers and corporations will see borrowing costs decline over the coming months. Removing the spread between the long- and short-term rates enables the short-term rate reductions to become a meaningful financial factor to consumers, who will see their long-term borrowing costs come down for major purchases like new and existing homes.

For the variable products industry, the answer to the question of where sales will be a year or two from now has never been harder to forecast! In the past when the Fed has cut rates as dramatically, it was enough to pull the economy out of a recession. But what if the current round of rate cuts arent enough, as some are beginning to fear? That leaves Congress having to act with bold and meaningful action, something along the lines of the 0% financing by the American automobile industry, which sent October sales to record levels.

The public will come out for a true sale and deal. But what will work for the public to regain confidence to spend and invest? Most economists favor significant tax cuts or capital gains reductions, actions that would have adverse material effects upon near-term VA sales.

While the jury is still out on the historic pump-priming actions taken to date, we will venture out with our premium flow forecast for the next three years, with the proviso that it will be subject to revision as needed.

For 2001, we anticipate ending the year at or about $113 billion in total premium flow. At $113 billion, the average quarterly premium flow would be $28.3 billion, down 17.7% from last years quarterly flow average of $34.4 billion.

The major market averages will continue to retrace their losses for the year, yet 2001 will end in the minus column. As a point of reference, the NASDAQ ended 2000 with a loss of 39%, the DJIA lost 6.2%, and the S&P 500 lost 9.1%. We expect 2001 to end the year with smaller losses, with the NASDAQ posting the most improvement by year-end.

While the markets continue to respond to the economic stimulus plans as noted above, we expect the major market averages in 2002 to retrace lost ground and ultimately end the year up on average 8% to 10%. It is important to note that while the equity markets are traditionally leading indicators, variable annuities have lagged the markets by three to six months. For 2002, we forecast a return to positive ground, with year-end total premium flow rising 7% to $121 billion, which would end the year 12% under 2000s record sales of $137 billion.

The year 2003 could be a pivotal year for the VA industry. It would be the first year VA sales could climb to the previous all-time high of $137 billion, although we see this as a difficult scenario. For 2003, sales should reach about $132 billion, up 9% from our 2002 forecast.

To reach the previous high of $137 billion, a 13% rate of growth would be needed for the year. As a reference point, between year-end 1997 and year-end 2000, the average VA industry growth rate on total premium flow was 16%. Over that period the NASDAQ average annual return was 48.9%, the DJIA was 21.3%, and the S&P 500 was 27.6%. Also, remember that those incredible bull market returns fueled the last two biggest VA quarterly sales volumes in the first two quarters of 2000 at $36.5 and $36.6 billion, respectively.

Consensus among market forecasters is for a lower than historic average return for the markets over the coming two to three years. Most forecast returns of approximately 6% to 9% over the period.

In 2004, the year most likely to eclipse the historic record of $137 billion, sales should rise 10% from 2003 to approximately $145 billion. Recapping our figures, we see conservative total premium flow increases over the coming three years of 7%, 9%, and 10%, respectively.

Historically, in bull market years, by the end of the third quarter the overwhelming majority of the nations Top 25 issuers have sales ratios of 75% or higher. Sales ratios can be used as a measure of market momentum. This year, we have only three companies whose new sales ratio are at 75% or higher. TIAA-CREF (74.6%), AIG/SunAmerica (90.3%), and Kemper Investors Life (126.9%). Hartford and Allmerica followed closely with ratios of 70.3% and 71%, respectively. Additionally, companies with new sales ratios in the 60% or higher range are doing well in a most difficult market.

When it comes to sales momentum for individual VA contracts, 32 or 32% of the Top 100 have new sales ratios of 100% or higher. Five of these 32 are brand new this year. One of these contracts, the Pacific Life Pacific Innovations Select ranks 24th with $775 million in the year-to-date period. Other contracts in the Top 25 with new sales ratios of 100% or higher include Kemper Investors Life Insurance Company Kemper Destinations (168.4%) with new sales of $1.4 billion, Hartford Life Insurance Companys Hartford Leaders (104.2%) with new sales of $1 billion, and AIG/SunAmericas Anchor Advisor (215.4%) with new sales of $813.8 million.

While space only permits mention of the four contracts in the Top 25, the other 28 contracts are all noteworthy. The factors fueling the sales momentum of these above-mentioned contracts will vary by type of contract, distribution channel design, and investment incentives. For example, approximately 25% of these contracts are fee-based advisor-focused products with no front- or back-end sales charges. Some have enhanced fixed/GIA/DCA interest rates available to attract individual and group investments in a historically low rate environment. Others have enhanced commission structures and many have built-in or added special features.

As of third quarters end, the Top 100 VA contracts’ market share of total VA premium flow was 83%. That leaves 17% of the current market premium flow for the remaining 300 plus contracts, a sobering thought in a bear market with historically low short-term interest rates.

The proliferation of products, features, and funds over the past 36 months just begs the question of product and fund consolidation, not to mention issuer consolidation within the annuity industry itself. Over the coming two to three years we should witness product and fund consolidations as well as new alliances and partnerships to achieve common goals, as profit margins and net flows continue to remain below historic levels.

Take for example the double-edged sword of aligning fund profitability with asset retention efforts. American General Life recently added 25 investment options to the existing 17 within their variable universal life product line. This action is typical in both variable annuity and variable life products as issuers strive to provide contract owners with broad-based diversification of fund options across all the major asset classes. By providing the widest range of investment opportunities, issuers hope to eliminate yet another reason for contract owners to 1035 their contract.

When VARDS issued its first report in 1988, the average number of funds in a VA contract was five. That number has steadily increased to 33 as of mid-year 2001.

As the total number of funds in variable products continues to rise, the issue of profitability grows. For example, 61% (6,305) of all the VA subaccounts in the VARDS database have assets of $10 million or less; 1,479 subaccounts (14.4%) have assets between $11 million and $25 million; 886 (8.6%) have assets between $26 million and $50 million, 658 (6.4%) have assets between $51 million and $100 million; while 974 funds (9.5%) have assets over $100 million.

In the Info-One/VARDS and Milliman USA Joint Study on 1999 Variable Annuity Feature Utilization, surveyed data found that the weighted average of the number of subaccounts utilized by a typical investor in todays retail variable annuity contract is 3.5. While the average number of subaccounts within variable products continues to rise, it appears that the average number used by contract holders has not grown commensurately.

Procedures to close subaccounts within existing VA contracts pursuant to Rule 26(c) of the Investment Company Act of 1940 are cumbersome and restrictive. Recent activities on the part of issuers to close unprofitable funds outside of compliance with Rule 26 (c) have been successful, and may ease forthcoming fund consolidation efforts.

The myriad of issues inherent in VA product consolidation will continue to impact both internal and external exchanges throughout the industry. The current downtrend in net asset flow which began in 1997 (exception in 1999), will continue this year and more likely than not through 2002. Eventually a plateau will be reached and net asset flows will change to the upside. Signs and portents will emerge that will signal this much anticipated event, and we will look forward to bringing our readers the news.

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


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 3, 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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