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.
In the category of nongroup contracts, out of 815, 62 or 8.6% have fixed/general interest accounts, which are closed to new money deposits. The rise in the stock market, which has spurred overall industry VA sales, has not led to a continued rise in the bank share suggesting that the fixed/GIA options of VAs may have been the alternative of choice in banks for the first half of the year. The direct response channel and the bank channel remained unchanged at 1% and 14%. Total third quarter reported sales by distribution channel dollars was $94.2 billion, or 99% of all reported total sales to the VARDS universe.
Behind the backdrop of steadily increasing sales and renewed customer interest in VA contracts and their living benefits is a rising awareness and concern for compliance and suitability. The fact that individuals tend to overinsure after a loss event could explain the heightened interest in the growth of living benefit features in the wake of the 3-year bear market.
The downside to the substantial increase in the widespread availability of these features is the lack of individual sales agent understanding of all of the features available in the stable of VA contracts available for sale at each firm. Current in-depth sales agent research from this fall reveals that sellers often promote “the feature of the day” and do not have a solid working knowledge of all the benefits available to them. These findings confirm previous research from 2002 that product proliferation has not kept pace with product knowledge and education.
While it appears more likely than not that 2003 will break the back of the 3-year bear market, VA issuers struggle to improve and fine-tune their balance sheets. For annuity issuers, earnings are more dependent than ever on investment market performance. In the “old days,” companies had investment exposure on the left side of the balance sheet and mortality risk on the right side. Today they have investment exposure on both the asset and liability side.
A key challenge for annuity issuers is providing what both distributors and consumers want without placing the balance sheet at risk. The pressure to improve earnings and increase shareholder value, while at the same time keeping the rating and regulatory agencies satisfied, has presented unique challenges in 2003, challenges which will continue through 2004. Presently Fitch Ratings holds a stable outlook for the insurance industry, while A.M. Best and Moodys still hold negative outlooks.
In previous commentaries we have discussed the need for VA issuers to create product designs that would protect against market downturns with designs where the policy charges would be based on a percentage of premiums or benefit base vs. account value. This past September, New York Life launched its new LifeStages Elite Variable Annuity. This is the first product we have profiled in our database to base VA policy mortality and expense fees on “adjusted premium payments.” These adjusted payments do not include allocations to the fixed/GIA.
The big question we have to ask is whether or not this product launch is the beginning edge of a new wave of products or just a test case? It is our understanding that there will be a few more VA products with this structure coming to market by year- end. The true test of this new design and ultimately any products market acceptance lies in the sales statistics, which we will watch with interest.
On the subject of VA product proliferation, a check of the VARDS database of new contract issues reveals that as of this writing approximately 60 VA products have come to market in 2003 (excluding New York State issues), vs. 100 in 2002, 86 in 2001, 99 in 2000 and 68 in 1999. The wave of new products featuring liquidity and asset protection benefits, which came to market over the past 3 years, has slowed this year.
Variable annuity veterans from the legal and fund side of the business have stated that 2003 has been the busiest and beset with the most formidable challenges of the past 15 to 20 years.
The investigations launched by New York Attorney General Elliot Spitzer in September into the market timing issues of the mutual fund industry spilled over to the insurance industry in early November. SEC spokesperson John Nestor was recently quoted, saying that these efforts are designed to leave “no stones unturned.” Hearings on Capitol Hill have added additional pressure, as the SEC has been highly criticized for failing to detect the widespread abuse of the market timing practices.
For the VA industry 2004 will continue to present a wide variety of challenges, from the product and regulatory front to the balance sheet and shareholder front.
is managing director of research and the founder of The VARDS Report, a Roswell, Ga., publisher of annuity statistics. VARDS is a product of Finetre Corporation. He can be reached via e-mail at firstname.lastname@example.org
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 5, 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.