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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.”

Of course, “we infer any movement in the right direction as hopeful,” says Elvin Turner, a vice president at the Harford, Conn., asset manager and research firm. “But well need two or more quarters to see whether the hope is real.”

Conning does its own annual study of the VA market, based on statutory figures supplied to state insurance departments. The most recent version”Variable Annuity Marketplace: Thriving in Unfamiliar Terrain”just came out. It covers individual VA results through 2000.

A key finding in that report is that 1035 exchanges (which Conning reports as “surrenders”) grew by 28% a year, from 1997 through 2000. That is “roughly twice the rate of premium and deposit growth,” Conning says.

If net flows have increased some since 2000, Turner says, thats good. “But, to us, whether the net flows represent 26% or 32% of total premiums, they are still not where they should be. The 1035 exchange activity, from VA to VA, is still too high.”

Does he share Marrions view, that many VA owners have been making 1035 exchanges into EIAs? “Anecdotally, that assessment is on target,” Turner says. “But we dont yet have any proof.”

Whatever the relationship between EIA sales and VAs in past quarters, Marrion predicts EIAs will continue to see strong sales through the rest of 2002perhaps reaching $9 billion industry wide. Much of that will be from sales of the bonused EIAs, he thinks.

The debut a few months ago of a registered EIA from ING Financial may further help this along, especially if other insurers roll out registered EIAs, too, he says. His reason? Such products will enable securities brokers to offer a product with built-in guarantees as well as upside potential, he says.

As for the future of VA sales, Connings Turner says the long-term outlook is “bleak” if policy exchanges continue at historic levels of 68% or more. But, since annuity owners make up only an estimated 6% of the U.S. population, he says the business has room to grow. But to do that, insurers need to “increase their customer focus, particularly by improving marketing and field relationships.”

The top EIA sales leader in the first quarter of 2002 and in seven of the last eight quarters was Allianz Life Insurance Company of North America, Minneapolis. (The others were: Midland National, in second place; American Equity, third; AmerUS Group, fourth; and North American, fifth.)

But Allianz also saw strong sales in its VA line, says Christopher Pinkerton, president and chief executive officer of U.S. Allianz Investor Services. “Our 1st quarter VA premiums were 200% higher than the same period last year, on sales of $256 million,” he says, noting that VARDS named it the fastest-growing VA distributor as a result.

In view of Allianzs sales growth in both EIAs and VAs, how do its leaders view the policy exchange issue? Is money flowing from VA to VA and/or from VA to EIA?

“There has been a big flight to safety going on,” answers Patrick M. Foley, president and chief marketing officer of Allianz Marketing Inc. “So, yes, we are seeing a lot of exchanges from VAs into our EIAs. But the money is coming from VAs that lack built-in guarantees.

“We are also seeing exchanges into our EIAs from traditional fixed annuities. Generally, these come from FAs with poor renewal interest rates or FA companies with stability concerns.”

“The growth in our VA sales also reflects the flight to safety,” contends Pinkerton. How so? “Our VAs have some built-in guarantees,” he explains, “and only 50% of our VA premium has come from 1035 exchangesa lower percentage than the industry average.”

“What youre seeing in all of this,” says Foley, “is that people want a floor under their money.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 10, 2002. Copyright 2002 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.