New VA Sales In Second Quarter Up Despite A Down Market

By

The variable annuity industrys second quarter new sales of $28.3 billion posted a 3.7% increase over last years second quarter new sales of $27.3 billion, and a full 10% increase over last quarters new sales of $25.7 billion.

New sales do not include internally exchanged VA contracts. Year-to-date new sales of $53.9 billion are slightly under last years year-to-date total of $54.3 and are 51% of last years total new sales of $106.6 billion. Year-to-date internal exchanges of $1.3 billion continue to decline, and at 2.3% are at recent historic lows.

While it may not be statistically significant, it is an interesting fact that over the past eight years every second calendar quarter since 1995 has seen higher sales when compared to the first calendar quarter. Traditionally, the explanation has focused on last minute IRA contributions in the month of April, which is credible.

The aggregate losses for the major market indices continue to suggest that by years end we will have witnessed a third straight year of this historic bear market in equities.

As of the end of July, the year-to-date losses in the Dow Jones Industrial Average, the S&P 500, and the NASDAQ were -12.82%, -20.60%, and -31.90%, respectively. The IBD Mutual Fund Index posted a year-to-date return of -25.6%, while the VARDS Growth Fund Market Average posted a loss of -22.7%.

With the exception of high yield bond funds, all of the VARDS corporate and government bond fund market averages posted positive returns for the year-to-date period, as did the money market average.

Market losses continue to erode VA industry total net assets which were valued at $829.5 billion in the current year-to-date period, a 6% decline from 2001s year-end total net assets of $885.7 billion. For as positive as the first quarters market action was, losses in the second calendar quarter wiped out any hope that the much anticipated recovery was going to continue in the near-term.

While 64% of the Top 25 VA issuers, as measured by assets, posted positive first quarter asset growth, as of mid-year no issuers in the Top 25 held a positive growth statistic when compared to year-end 2001. Percentage changes for the group ranged from a low of -1.5% to a high of -13.8%. The Top 25 VA Issuers market share of all VA industry total net assets is currently at 92.4%.

Variable annuity net sales for 2001 were $30.0 billion, or 27.0% of the years total premium flow of $113.0 billion. Net sales for the first calendar quarter of 2002 were $7.1 billion, which is 27.0% of the quarters total premium flow of $26.4 billion.

Perhaps the most important industry trend to monitor in any given year, going forward, is that of a discernable rise in quarterly net sales for a sustained period. Net sales in the VA industry have been declining since the last recent high in 1997 of $58.6 billion dollars.

Strong premium flows for issuers this summer resulting from a renewed focus in a bear market on special features like enhanced death benefits and other contract/investment guarantees could portend either a rise in net sales or a rise in 1035 contract exchanges.

Either way, any rise in VA industry sales in this particular market may prove to be a double-edged sword, as market watchers caution a renewed focus on the issues of feature suitability for VA buyers. These net flow statistics are compiled by VARDS on behalf of The National Association for Variable Annuities, Reston, Va..

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 ( 9th to 4th), Aegon/Transamerica (17th to 7th), Lincoln National (13th to 9th), Manulife (12th to 10th), Allmerica (15th to 12th), Phoenix (25th to 19th), The Prudential (22nd to 20th), and Allianz (34th to 24th). 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.