Third-Quarter VA Sales Up 7.8% Over Last Year To $27.7 Billion
Third-quarter new variable annuity sales of $27.7 billion posted a 7.8% increase over last years third-quarter new sales of $25.7 billion, and were but a scant 2% lower than last quarters $28.3 billion.
Year-to-date new sales of $81.8 billion are 76.7% of last years $106.7 billion, positioning the industry to meet or exceed last years new sales, barring any significant decline in the U.S. equities market. To match last year, a fourth-quarter minimum of $24.9 billion would be needed–a plausible number considering average new sales for the past two quarters have been $28 billion.
Despite the equities markets horrendous performance in the third quarter as noted below, the fourth quarter with considerable strength. As readers of these reports have probably noted, we are now focusing on new sales versus total VA sales. New sales do not include internally exchanged VA contracts. Year-to-date internal exchanges of $2 billion–2.4% of total sales–remain at historically low levels.
The U.S. equities market ended the third quarter posting the worst quarterly losses since the 1987 crash. The month of September posted its worst performance since the Great Depression. The Dow, NASDAQ and S&P 500 all posted losses for the month of 12%, 11% and 11%, respectively. As for the third quarter, these same indices posted losses of 18%, 20% and 18%, respectively.
Entering the final quarter of the year, it appears that unless investor market sentiment makes a historic turnaround, 2002 will take its place as part of the first three-year consecutive bear market since 1941. Thats the bad news; the good news is the third quarter is over and October posted record gains, as the corporate earnings scorecard showed glimmers of improvement on the horizon.
Last quarters market action took its toll on VA industry total net assets, which settled at $753.6 billion, down 14.9% from 2001s year-end total of $885.7 billion and down 9.1% from the second quarters $829.4 billion. Historically, the highest year-end industry total net assets recorded were in 1999, at $973.5 billion. The current bear market, which began the following year, has eroded a full 22.6% of the VA industrys assets.
Each of the Top 25 VA issuers at the end of the third quarter continued to post asset losses ranging from a low of -7.3% for New York Life to a high of -35.2% for Mass Mutual.
The Top 25 VA issuers continue to control 92.3% of all VA industry total net assets, while the Top 5 control 53%, a significant number.
TIAA-CREF continues to head the third-quarter new sales leader board, while Hartford improved its year-end 2001 third-place rank to second, switching places with AIG/Sun America/VALIC. The MetLife/NEF/Gen Am/MLI enterprise moved to fourth from seventh, with Equitable rounding out the Top 5.
Six issuers have third-quarter new sales ratios that are 100% of last years total new sales. Ranked in order of highest ratio they include Allianz Life at 219.4%, Aegon/Transamerica at 131%, Phoenix Life at 117%, Jackson National at 113.8%, IDS Life at 104% and MetLife/NEF/Gen Am/MLI at 100%.
While consolidation continues to open up the leader board of Top 25 VA issuers, as noted above, consolidation of assets continues to centralize market share in a smaller number of enterprises.
While TIAA-CREF holds the top spot for total year-to-date new sales, Hartford holds the record for having more Top 25 VA contracts ranked by new sales than any other company at an impressive count of four! In the perennial Director series there is the B-share Director ranked 5th, and the L-share Director Outlook ranked 8th. The Hartford Leaders B-share ranks 14th and its sister L-share, the Hartford Leaders Outlook, ranks 20th.
Out of the Top 25 VA contracts third-quarter market share of total new sales of 46.6%, these four contracts alone garnered a market share of 6.1%. Other notables for the quarter include the fact that nine of the Top 25 VA contracts have sales ratios in excess of 100%, and two contracts are new products in 2002.
The sales ratios range from a high of 557.4% for the Phoenix Home Life Retirement Planners Edge to 100.6% for Pacific Lifes Innovations Select.
With this report we have included a pie chart illustrating industry new sales broken out by share class type in the VARDS Non-Group Open category. This category excludes closed and group registered VA contracts.
The current quarters Top 25 VA contracts share class breakout holds 5 L-share products (20%), 1 C-share product (4%) and 19 B-share products (76%).
The effects of both capital transfers and market appreciation/depreciation are evident in a comparison of third-quarter VA industry assets by investment objective to year-end 2001. For example, the market share of assets held in the fixed/general interest accounts is presently 29.7% compared to 22.2% at the end of last year.
The next largest category by market share is that of the growth and income funds, which has fallen to 20.3% from 23.9% at the end of last year. Growth funds have fallen to 15% from 18.8%, while the balance of all other equity funds has fallen from 16% to the present 12%. Money market funds have grown slightly, up a little over 1 percent, while the combined bond and fixed income sectors have grown a little over 3%. Balanced/asset allocation funds have grown by just over a quarter of a percent.
As noted in this report last quarter, the impact of the extended bear market on the fee-generating asset bases of variable product issuers has led to a host of credit watches and downgrades. Expanded coverage of myriad financial issues in the press, from negative money market returns in a growing number of VA contracts to calls for greater risk-based financial disclosure and tighter accounting standards, have prompted new dialogues and needs-based solution discussions across the industry.
In the Aug. 12, 2002 National Underwriter, Tim Pfeifer wrote a market analysis titled, “Despite The Market, Silver Linings Exist For The VA And VL Community.” In that article he addresses the need for issuers to create product designs that will protect against major market downturns and noted that a few had already begun the process. He writes, “One example is to define policy charges as a percentage of premiums or benefit base, not account value. Further, charges for guaranteed minimum death or living benefits could be assessed on a per-$1-of-amount-at-risk basis. This would make charges higher when the risk is higher, as opposed to many guaranteed benefits today, which have a high charge when the risk is low and vice versa. Also, mortality and expense and asset management charges may be tiered based upon subaccount or policy performance. Designs that mitigate insurers downside risks can conversely allow for features benefiting the policyholder, especially in bull markets.”
Reading the signs and portents of the variable annuity industry as it works its way through the issues brought to light by the bear market, it seems evident that the stage is being set for a fundamental debate regarding historic business models and their metrics. The pressures on public companies today to solve for improved shareholder equity and earnings will ultimately spur some issuers to become early adopters of a “Smarter” pricing model, as noted by Pfeifer.
I believe this re-tooling effort will become the major force behind the battle for improved financial dynamics within the variable products industry, and all but guarantees continued product proliferation.
For the Top 25 VA contracts and their issuers, the stage is set for new opportunity and leader board movement in the next few years as issuers address the challenges ahead.
is editor of the VARDS Report, a Roswell, Ga., publisher of annuity statistics, and managing director, professional services, for Info-One.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 2, 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.