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December 02, 2001 at 07:00 PM
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.
