Where is the money coming from in annuity sales today? That question sits behind the new annuity sales reports that are coming out on first quarter sales.
For instance, equity index annuities had a record sales quarter in the first three months of 2002beating the industrys previous record in the 4th quarter of 2001.
Total 1st quarter sales in 2002 reached $2.168 billion, according to the Advantage Equity Index Sales Report, from The Advantage Group, a St. Louis, Mo., EIA tracking service. (See Chart 1.) Thats up 7% from the previous quarter and up 72% from the same period last year, says Jack Marrion, president.
By contrast, total 1st quarter premium flows of variable annuities were $26.2 billion– down 5.8% from the 4th quarter 2001 and down 7.9% from the 1st quarter of 2001. The figures come from a survey done by VARDS, a Pivot/Info-One company, on behalf of National Association for Variable Annuities, Reston, Va.
Alluding to the VA sales decline, Marrion says he believes much of the bounce in 1st quarter EIA sales came from 1035 policy exchanges–from VAs.
His firms 1st quarter survey did not track sales created by 1035 exchange business, Marrion allows. However, it did track 1035 exchange activity in its year-end 2001 survey, he says, and “at that time, roughly 60% of money coming into EIAs was new money, and 40% was from policy exchanges, especially from VA products.”
It appears as if 1st quarter 2002 EIA sales have continued that pattern, he says, but with even greater policy exchange activity. The reason for this assessment, he says, is that the 1st quarter survey picked up a huge jump in the sale of bonused EIAs, or EIAs that pay a first-year interest rate bonus.
Specifically, bonused EIAs represented 40.36% of first quarter EIA market share. By comparison, in 2001, they represented 33.4%, 24.6% and 19.72% of market share for the fourth, third and second quarters, respectively. (See Chart 2.) Thats significant, Marrion contends, because the growth occurred at the very time when EIA sales attributed to policy exchanges from VAs began rising.
Hence, it is likely that the continued rise in bonused EIA sales in the 1st quarter of 2002 reflects, to a large extent, policy exchanges from VAs into EIAs, he says.
Such a scenario is all the more plausible, Marrion maintains, given that stock market values fell over the same period. That made VAs less attractive to worried investors, he posits, and EIAs, with their upside potential and interest rate floors, more attractive.
However, the VA survey released by NAVA (mentioned earlier) shows that even though total VA sales have declined in the past several quarters, new money coming into VAswhat the report calls “net flows”were up by 43.9% in the 1st quarter of 2002 over 1st quarter last year. (They were $8.2 billion for the quarter in 2002 versus $5.7 billion in 2001.)
In terms of actual premium dollars, the $8.2 billion 1st quarter 2002 net flow figure was down slightly from the 4th quarter of 2001 (when it was $8.6 billion). However, when looking at net flows as a percent of total premium flows, net flows have “gradually grown from 20.1% for the 1st quarter of 2001 to 31.3% of total flows during the 1st quarter of 2002,” says NAVA.
An executive at Conning & Company views the VA net flow figures as a “marginal improvement.”