New VA Sales In Second Quarter Up Despite A Down Market

Of the Top 25 VA issuers, 14 have year-to-date new sales which equaled or exceeded 50% of last years new sales. Half of these issuers have mid-year new sales ratios of 60% or higher, and are strongly on track to surpass their 2001 annual new sales levels. In descending order by sales rank the issuers include the MetLife/NEF/GenAm/MLI group at 66.3%, Aegon/Transamerica at 74.6%, Allmerica Financial at 64.9%, Phoenix Life at 64.7%, The Prudential at 61.5%, Jackson National at 63.1%, and Allianz Life at 121.8%. Allianz Life Insurance Company of North America joined the Top 25 VA Issuers last quarter ranked at its current number 24 spot. While the company does not have a contract that is currently in the Top 25 listing of VA contracts, its USAllianz Alterity product occupies the number 29 spot out of the Top 100 selling VA contracts. The contract was responsible for $456.4 million in year-to-date new sales of Allianzs $630.9 year-to-date new sales total.

The Top 25 VA Issuers market share of year-to-date industry new sales is 91.1%, as compared to 90.4% last year in the same time period. Notable sales ranking advances in the year-to-date period from the same period last year include, MetLife/NEF/GenAm/MLI ( 9^th to 4^th), Aegon/Transamerica (17^th to 7^th), Lincoln National (13^th to 9^th), Manulife (12^th to 10^th), Allmerica (15^th to 12^th), Phoenix (25^th to 19^th), The Prudential (22^nd to 20^th), and Allianz (34^th to 24^th). Eleven issuers (44%) improved their overall placement in terms of Top 25 ranking position while eleven issuers (44%) lost placement. Three issuers ranking position remained unchanged in the year-to-date 2001/2002 comparison.

As noted last quarter, in the category of Top 25 VA contracts ranked by new sales, sales momentum for 2002 as compared to 2001 has been on a rebound. By the end of the year 2001, only four VA contracts had equaled or exceeded their previous years sales. Using the new sales ratio as a benchmark, in the year-to-date period 16 (64%) contracts have a sales ratio of 55% or higher. In order of descending new sales rank, contracts with extraordinary momentum (ratios of 80% or higher) include the Transamerica Landmark VA (156.7%), the Hartford Director Outlook (84.1%), Manulifes Venture III (378.5%), the Phoenix Retirement Planners Edge (149.5%), Allmericas Scudder GATEWAY Plus (117.8%), American Skandias XTra Credit SIX (a brand new product this year), Prudentials Strategic Partners Annuity One (95.1%), the Hartford Leaders Outlook (80.7%), and the second brand new product to make the Top 25 VA Contracts list, the Jackson National Life Perspective II Fixed and Variable Annuity. The Top 25 VA Contracts controlled 47.0% of total new VA industry sales in the year-to-date period as compared to 41.2% of 2001 year-end new sales.

In previous installments of this commentary, we have focused on some of the key characteristics of the Top 25 VA contracts, which have evolved over the past 24 to 36 months.

In the category of share type, at the end of last year there were 2 L-shares, 2 C-shares, and 21 B-shares. As of mid-year 2002, the number of L-shares has doubled to four, while we have one less C-share and one less B-share. The four L-share products include Pacific Lifes Innovations Select, the Hartford Director Outlook, Manulifes Venture III, and Hartfords Leaders Outlook.

The C-share product is the Phoenix Retirement Planners Edge. The average number of fund choices available in todays Top 25 is approximately 47 versus the industry average of 38. Some products offer as many as 67. Over the past 15 years, the number of investment options has grown from an average of five in the mid-eighties to the current 38, a percentage increase of 660% or 840% when compared to the Top 25 of today. An examination of the nine VA contracts noted above whose year-to-date sales ratios were 80% or higher finds that all of them offer dollar cost averaging (DCA), five (56%) offer enhanced DCA features, seven (78%) offer optional death benefits, five (44%) have purchase payment bonuses (two of which are optional), and four (56%) have a guaranteed minimum income benefit.

Mid-year channel sales have seen no change in the market shares from the end of last year in the Captive Agency, Bank/Credit Union, Regional Investment Firms, and Direct Response groups. Current period channel changes show a 2% drop in New York Wirehouse to 12%, and a 2% gain to 26% for the Independent NASD Firm channel. These figures are calculated from the category of total VA industry sales.

Fixed Interest/General account VA assets rose to their highest levels since the end of the year 1997, coming in at 25.21% of total industry assets. Money market assets as of mid-year have remained closely aligned with year-end 2001 market share as have the percentages for balanced/asset allocation, with mid-year shares of 4.59% and 7.70% respectively.

Equity losses and reallocations to bonds or cash will account for much of the loss in the equity categories. Growth funds lost a full percentage point from year-end 2001, coming in at a mid-year rate of 17.75%, while growth and income funds percentage was 22.76%. In the category of All Other Equity Funds assets were 13.98% of total industry assets while Corporate Bond High Quality and All Other Fixed Income Funds rose to shares of 1.79% and 6.22%.

The economic recovery continues to falter as profit warnings from techs and retailers and a weakening manufacturing sector are feeding the bears that have free reign on Wall Street. A double-dip recession is being discussed more frequently with stark comparisons to the 1958/60 and 1980/82 periods, which were followed by substantially lower inflation. With inflation already at near historic lows, the fear of deflation, which has plagued the Japanese economy for more than a decade, is also surfacing.

The week of July 29, 2002, witnessed a flurry of activity centered on the credit worthiness of a number of U.S. insurers. Standard & Poors revised its outlook for the entire U.S. life insurance industry sector to negative from stable. Four groups of life insurers were placed on CreditWatch, and six additional insurers ratings were revised from stable to negative. As the agency noted, “These actions reflect strained capital adequacy at a number of companies because of increased losses on credit instruments, lower values of equity holdings, increased reserving requirements for life-insurance minimum-death-benefit guarantees, and growth in fixed-annuity products.”

For the VA industry, insurance analysts are particularly concerned with watching the delicate balance between corporate earnings and the cost recovery issues inherent in the large 1035 exchange rates of recent years. As we have noted in the recent National Underwriter Aug. 5, 2002, feature by Jim Connolly titled, “Due To Market, VA Benefits Now Giving Issuers Headaches,” the current bear market in equities is a “real-time test” of the products of recent history, their accounting issues, and the relationship model currently in place between issuers and their distributors.

The on-going issues of product design and pricing as well as client suitability will be in the news for many months to come. One thing is for certain, the VA industry landscape is headed for significant change as its institutions adjust to new market dynamics and consumer concerns in a declining wealth environment.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 9, 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.