Variable annuity new sales continue to build momentum, hitting a total of $31.3 billion in the quarter ended Sept. 30, 2003.
Year-to-date sales of $93.1 billion were 83% of 2002s total new sales of $112.3 billion. With current average quarterly year-to-date new sales of $31 billion, this year is on track to surpass last years sales by 10%. Our forecast for this years new sales is approximately $124 billion. The VA industry record for total new sales was $128 billion, posted in 2000, the first year of the three-year bear market.
This years marked turnaround can be traced to the best sustained equity market returns of the past 3 years, coupled with increasing client interest in the insurance benefits of the annuity contracts themselves. As of Oct. 31, 2003, year-to-date returns for the NASDAQ and S&P 600 (small-cap) indexes were 44.7% and 30.4%, respectively. The S&P 500 and Dow Jones Industrials respective returns were 19.4% and 17.5%.
For the VA industry, which has witnessed 3 straight years of declines in the assets underlying VA contracts, rising stock valuations mean the beginning of improved profitability from fee-based income. With 9/30/03 year-to-date assets of $911 billion having surpassed last years total net assets of $797 billion, the industry is on its way to once again hitting the $1 trillion mark, last reached mid-year 2000. If net flow levels are at least $11 billion per quarter and average blended returns achieve a 5% annualized rate, the industry should reach the $1 trillion mark by 9/30/04.
Much of the health of the VA industry is tied to a return to sustained asset growth from which fee-based revenues are so heavily dependent through substantially improved net flows as well as continued positive investment returns. In 1997 VA industry net flows began a sustained downturn, hitting their lowest point at the end of 2001 ($30 billion). They rose slightly at the end of 2002 to close at $30.7 billion, or 27% of new sales.
Current net flow for the year-to-date period is $32.7 billion, or 35% of new sales, a substantial improvement over 2002.
VARDS research indicates that approximately 48% of 2003 VA sales are 1035 exchanges, a figure which has also dropped from previous years; reductions in 1035 exchanges coupled with increases in both sales and net flows are healthy signs for the industry. If fourth quarter net cash flow matches third quarter levels, 2003 could achieve $46 billion of positive net cash flow, hitting 37% of new sales and a 50% increase over 2002–levels exceeding those of 1999 when industry net flow reached $43.9 billion and 34% of new sales.
Market share for the Top 25 VA issuers ranked by 9/30/03 year-to-date new sales grew to 94.2% of all issuers, up substantially from last years third quarter year-to-date share of 87.8%. The notable newcomer to the Top 25 issuers in this period is Security Benefit Life Insurance Company. The last time this VA issuer was in our Top 25 was in fourth quarter 1996, almost 7 years ago.
Top 25 VA issuers with new sales ratios exceeding 100% in the year-to-date period ending 9/30/03 (ranked in descending order of sales rank) include Hartford Life (112%), Equitable Life (129%), Metlife/NEF/GenAm/MLI (113%), Pacific Life (109%), Jackson National Life (115%), Ohio National Life (119%), Security Benefit Life (116%), and Guardian Life (208%). VA sales of these firms comprise 32% of the Top 25.
The Top 25 VA contracts market share of total industry year-to-date new sales is presently at 53.6%, up substantially from year-end 2002s market share of 43.3%. Thirteen issuers have contracts in this group, with 5 issuers having 2 or more contracts in the group. Ranked in order of the most contracts held in the Top 25 are Hartford Life (5), Equitable Life (4), MetLife (4), ING (2), and Pacific Life (2). Fourteen (56%) of these Top 25 contracts have year-to-date new sales ratios of 100% or more.
As already noted, client interest in the insurance benefits of variable annuities continues to grow after the loss events of the past 3 years. The marketplace has responded with a plethora of living and death benefits. In the third quarter, 20 of the Top 25 nongroup contracts offer one or more living benefit options. This group differs slightly from the overall Top 25 VA contracts in that it excludes 3 group contracts; VALIC, TIAA-CREF, and INGs Account C. The 3 additions include Nationwides The BEST OF AMERICA- Americas Future Annuity, Prudential/American Skandias Strategic Partners, and USAllianz Alterity.
In this group 14 have a Guaranteed Minimum Income Benefit (GMIB), 9 have a Guaranteed Minimum Withdrawal Benefit (GMWB), 3 have a Guaranteed Minimum Accumulation Benefit (GMAB) and 11 have a bonus feature. Share class division of this group includes 18 B-shares and 7 L-shares. 2003 trends for this group include the growth of the GMWB, with 3 contracts adding the feature. Hartfords sales success with the feature has proven its market value. Nine contracts have effected changes to their death benefit charges and/or structures, while one contract added a GMIB and one removed its GMIB.
Overall equity-based investment asset allocations for this group have increased from an average of 46.6% one year ago to 52.3% as of 9/30/03. Seventeen of these contracts (68%) have overall equity- based investment asset allocations exceeding 50%. Of the 8 contracts with less than 50% equity allocations, 4 are L-shares (out of 7 in this group) with 2 holding over 33% of their assets in the general interest accounts. Inasmuch as L-share contracts feature reduced contingent deferred sales charges, they should be monitored for cause-and-effect relationships between the shortened CDSC period and asset allocation dispositions. Fixed income funds account for 14.9% of this groups assets, while the general interest accounts hold 20.2%. The average number of overall investment/subaccount options is currently at 46. The American Express Retirement Advisor Advantage contract offers the most investment options with 69, while the least number (19) is offered by the MetLife Investors Variable Annuity Class L contract.
Assets by investment objective for the entire VA industry confirm the rise in equity investment assets noted above for the Top 25 nongroup contracts. Growth funds are up by 1.65%, as are growth and income funds (+.54%) and all other equity funds (+.39%). Balanced/asset allocation funds are up by .24%, while corporate bond high quality funds are down–.35%, as are all other general fixed income funds (-1.38%). Money market funds are down by -1.27%, as are all fixed/general interest accounts (-1.37%).
Sales by distribution channel remained much the same from the mid-year period. Both the captive agency channel and the regional investment firms lost a percentage share point ending the 9/30/03 period at 33% and 12%, respectively. The New York wire houses and independent firms each gained 1%, ending the third quarter period at 13% and 27%, respectively.
Last quarters 3-point market share increase for the bank channel reflected substantially improving VA sales for the channel in the first 6 months of 2003. No change this quarter suggests that VA bank sales have lost the momentum gained at the expense of declining fixed annuity sales in the first half of the year.