Over Same Period Last Year

By Rick Carey

Additional Charts (download acrobat)
VARDS Assets By Issuer
VARDS Contract Sales
VARDS Issuer Sales

For the variable annuity industry, which posted a 4.1% gain in 2002 new sales over the previous year, positive news on the sales front continued with first quarter 2003 new sales of $29 billion. This was a 12% gain over first quarter 2002 new sales of $25.9 billion.

This positive performance is being driven this year by a slightly different set of circumstances than was the case last year at this time. In 2002, sales were primarily focused on the insurance and liquidity features of the product–most notably the guaranteed death, income and withdrawal features–as the equities markets continued their free fall.

In 2003, the focus is on income and account buildup, as the talk of deflation escalates and Treasury yields hit a 45-year low. Interest rate spread compression has taken its toll on the availability of new fixed annuity offerings, enhancing the opportunity for VA issuers to market competitive rates in their fixed/general interest accounts.

Renewed interest in the account buildup features available through bonus income payments has also had a significant impact on increasing sales. As a percentage of total sales, sales of bonus products have risen during the current bear market, from a low of 28% at the end of the first quarter 2000 to a high of 35% at the end of this years first quarter. Top-performing contracts from the first quarter are highlighted below.

VA industry total net assets held the line during the first quarter, posting a negligible decline of .09% to $796.1 billion from year-end 2002 total net assets of $796.8 billion. This is a substantial improvement from fourth quarter 2002, which posted a 10.9% loss compared to fourth quarter 2001.

For the Top 25 issuers ranked by assets under management, eight (32%) posted asset growth for the period. Of this group, Hartford had the largest asset growth of $1.6 billion, a 2.6% increase from the previous reporting period. Hartford was followed by the MetLife/NEF/Gen Am/MLI enterprise with a $1.4 billion increase in assets under management. Equitable rounded out the group of three issuers who posted first quarter increases of more than $1 billion, with a $1.1 billion growth of assets.

The other five issuers posted asset growth between a low of $181 million to a high of $678 million. Of the 17 issuers with asset declines, losses ranged from a low of $59 million to a high of $1.2 billion.

The Top 10 and 25 issuers control 69.8% and 92.5% of total VA industry assets respectively. These market shares have remained virtually unchanged over the past year.

Equity-based assets declined by 2.33% last quarter, to 45.62% of total industry assets compared to year-end 2002. Fixed/bond fund assets rose by .93% during the first quarter to 11.11% of total assets. Money market assets remained unchanged at 4.89% while balanced/asset allocation declined to 7.42% of industry assets from 7.47% during the same comparative period. General interest account assets continued to rise to a share of 30.96%, up 1.45% from year-end 2002 assets. This year we could very well see this category exceed its all-time high of 34.71% at Dec. 31, 1995.

Over half (56%) of the Top 25 VA issuers are on track to meet or exceed last years new sales. These firms held first quarter new sales ratios of 25% or higher. Firms with very strong new sales ratios (30% or higher), ranked by new sales, include Hartford Life (33.2%), Equitable (37%), MetLife/NEF/Gen Am/MLI (34.2%), Nationwide (30.8%), Jackson National (34.7%), Allianz (30.7%), Guardian (126.7%), Thrivent Financial for Lutherans (38%) and Ohio National (42.2%).

Market shares for the Top 10 and Top 25 VA issuers ranked by new sales rose during the first quarter when compared to year-end 2002. Market share for the Top 10 rose to 68% from 62% and for the Top 25 market share rose to 94% from 92%. These increases, if maintained through the year, point to continued industry consolidation. Hartford, for example, has five VA contracts in the Top 25, Equitable has four, MetLife/NEF/GenAm/MLI has three, and AEGON/Transamerica and Nationwide each have two.

Of the Top 25 VA contracts, 21 (84%) had new sales ratios of 25% or higher, placing them on track to meet or exceed last years new sales volumes. Eight of these contracts had extraordinarily strong sales with ratios of 45% or higher. Ranked in order of new sales volume they include the Equitable Accumulator Plus 2002 (66%), the Hartford Leaders Outlook (46.6%), the Jackson National Perspective II (50.3%), the Equitable Accumulator 2002 (50.8%), the Guardian C+C (498.6%), the MetLife Investors VA Class L (102.9%), the Equitable Accumulator Elite 2002 (75.9%), and the Nationwide BOA-All American (86.7%).

As noted above, the best-performing VA contracts for 2003 feature opportunities for investors to enhance current income as well as take advantage of special liquidity and insurance features. Of the eight contracts noted above, half are L-shares, half are B-shares and half have bonus account payment features. These eight contracts all have death benefits with enhanced earnings benefit options and seven have guaranteed minimum income benefits.

Additionally, guaranteed interest accounts in VAs have become increasingly attractive as interest rate spread compression has lowered yields in fixed annuities. The shorter L-share and C-share contingent deferred sales charge (CDSC) periods make GIA interest rate payments very attractive as a competitive option to short maturity CDs, although many of the fixed accounts in these products have been closed due to concerns about persistency and the recovery of acquisition costs. Current competitive rates in GIAs and the ability to quickly transfer funds to variable investment options as equity market conditions improve are an attractive combination, even in the longer maturity B-share products.

VA sales by distribution channel have remained relatively static for the past year, with only minor changes taking place this quarter. Compared to the last calendar quarter, captive agency sales were unchanged at 35% and remain the largest of the sales channels. The second largest channel, independent NASD firms, gained a point this quarter, coming in at 27% of the distribution. New York wire houses were static at 13%, while regional firms lost a share point, coming in at 12%. Bank/credit union sales gained a point to close at 12%, while direct response lost a point to close at 1%.

The National Association for Variable Annuities released VARDS collected net flow statistics in early March for 2002. VA industry net flows increased slightly to $30.7 billion, up from 2001s net flow of $30 billion.

As we have noted in previous columns, the bottoming out of industry net flows and the move to a sustained increase would be a positive indicator reflecting improving health of the product line. We will watch with close interest this most important statistic, as this ever so slight increase was the first since 1997.

In late March, industry leaders attended NAVAs Retirement Income Conference, the primary focus of which was on the payout side of the annuity business. Current best practice and the ongoing challenges of communicating the benefits of annuitization to consumers and industry sales distribution channels remains perhaps the single greatest task facing the future success of annuities.

With many of the 77 million baby boomers starting to turn 60 in 2006, and almost $4 trillion of IRA dollars available for potential rollovers, the race is on to create fixed and VA products and sales systems to deliver a complex product. Yet to date the race is only among a small cadre of dedicated retirement income executives at a relatively small number of companies.

Total fixed and VA sales from immediate annuities and income riders from deferred contracts are very small (less than $7 billion) in comparison to new fixed and VA annual sales. The much-anticipated “Great Boom” ahead for payout annuity sales is like a mirage on a desert.

To the credit of the industry and those issuers actively engaged in the development and marketing of innovative income products, the effort is paying off in small but important ways. These products continue to build upon some of the major complaints both planners and customers have had about the payout side of the business, namely liquidity and commutation options.

Additionally, some of these newer generation products have instituted attractive enough compensation arrangements during the income or annuitized period to make it worthwhile for agents and distributors to sell the product. This is perhaps the most important bottom line development addressing the very real issue facing the growth of these products. Agents often joke about committing “annuicide” on their book of business by recommending a client annuititize their contract without any compensation paid to them for ongoing servicing and investment management.

It will also be critically important for product issuers to be in touch with the rapidly changing dynamics of consumer behavior and levels of financial risk assessment based upon age, ethnicity, gender, and socio-economic status. With less than 36 months until that leading edge of baby boomers begins retiring, issuers barely have enough lead time to validate and test the next generation of products.

The firms on the forefront of payout product design and compensation as well as consumer and agent education will more than likely be the leaders of the boom ahead.

Rick Carey is editor of the VARDS Report, a Roswell, Ga., publisher of annuity statistics, and managing director, professional services, for Info-One. He can be reached via e-mail at rvcarey@earthlink.net.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 2, 2003. Copyright 2003 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.