VA Sales Set Record In 1st Quarter At $34.4 Billion, New Sales Are Up 16.3% Over Last Year

By Rick Carey

Record-breaking first quarter 2004 variable annuity new sales of $34.4 billion and a significant

rise in equity valuations have returned profitability to the VA product line. The first quarter new sales performance represents a 16.3% increase over sales from first quarter 2003 and a 9.7% increase over fourth quarter 2003.

For the first time since 1997, the individual annuity industry should post record statutory operating income. Many VA issuers outperformed analysts’ first quarter earnings consensus, with some reporting record-breaking net income. Enhanced financial performance from annuities and asset-management services was driven by the recovery of the equity markets in 2003 and improvements in VA pricing and management practices.

Variable annuity total net assets reflected the rise in overall equity valuations for the past year by climbing over the $1 trillion benchmark for the first time since mid-2000. First quarter 2004 VA total net assets of $1.03 trillion grew by 2.9% over year-end 2003 total net assets and 28% over first quarter 2003 net assets.

However, while VA new sales posted record gains, net flows declined 27.1% from the last calendar quarter to $9.7 billion. This figure is 28.2% of first quarters new sales, below 2003s total of 36.9%. First quarter’s

net flow decline is in contrast to last year’s growth. As noted, While 2003 new sales were up 11% and total net assets grew by 23.7%, net flows grew by 49.8%!

What does the decline in first quarter 2004 net flow mean to industry sales? Record new sales and declining net flow points to either greater surrender activity or an increase in 1035 exchanges. With the equity markets posting significant gains in 2003, we suspect the industry may have experienced an increase in first quarter 1035 exchange activity rather than an increase in surrenders. Results from one quarter do not change the positive upward trend in net flows that began last year; however, they warrant scrutiny over the next few quarters.

The momentum of VA issuer market share consolidation continues. New sales market share of the Top 25 VA issuers grew from 93.6% at the end of 2003 to 94.8% at the end of the first quarter 2004. Market share of total industry net assets for the Top 25 VA issuers grew by less than 1% to a total share of 93.04%. The combined market share of first quarter new VA sales for the Top 10 VA Issuers is 69%.

Compared to year-end 2003, Merrill Lynch and Phoenix entered first quarter 2004s Top 25 while Ohio National and Guardian dropped off. Of the Top 25, 72% posted new sales ratios of 25% or higher. Two firms, Lincoln National and Allianz posted new sales ratios over 35%, while Aegon/Transamerica and GE Financial posted new sales ratios under 20%. Compared to year-end 2003, Lincoln National’s Top 25 first quarter VA ranking moved to 9th from 11th, and Allianz moved to 14th from 16th. In the same period, Aegon/Transamerica dropped from 13th to 16th, and GE Financial dropped from 19th to 21st.

Other first quarter 2004 Top 25 VA contracts with extraordinary growth as measured by new sales ratios of 35% or higher include Pacific Lifes Pacific Innovations Select (36%) and Pacific Portfolios (39.8%), ranked 11th and 22nd, respectively. MetLife Investors VA Class AA (37.2%) ranked 15th, and Prudential/American Skandias American Skandia APEX II (59%) ranked 23rd. The newly issued Equitable Accumulator Plus 2004 VA (229.4%) ranked 25th.

With mostly good news for the VA marketplace, the year is certainly off to a great start. Yet the fear of rising interest rates, oil prices and Middle East unrest have sent the equity markets into negative territory for the year. With oil at a 13-year high and the price of many commodities rising too fast for comfort, volatility in the stock market has increased significantly. As of this writing (5/18/04) the NASDAQ Composite is down 6.3% year-to-date, while the S&P 500 and Dow Jones Industrial Averages are down 2.5% and 5.2% respectively.

What does this mean for the variable annuity industry?

For the near term, the threat of rising interest rates and the volatility in the equity markets should not have a significant impact on VA sales. Over the course of the recent bear market, consumers’ interest in investing in VAs has been driven increasingly by the protection features of living benefits and enhancements to death benefits. The last time rising interest rates impacted VA sales was in 1994, when the level of interest rates was significantly higher than it is today. Fixed annuity sales grew as investors locked in the higher rates and guarantee of principal. At current interest rate levels, sales of fixed rate annuities should not draw investment dollars away from VAs. Investment performance of the stock market remains the primary driver of the VA marketplace. As such, its performance will be the final arbiter of the years success.

What is more likely to happen should equity market volatility continue is increased interest in the benefits of Equity Indexed Annuities (EIAs). While EIAs do not give investors the grand slam upside potential that a VA does, they do protect against a loss of principal with participation in equity appreciation. New product designs are just beginning to appear which promise significant improvements over previous designs. EIAs are becoming more consumer-friendly and offer greater upside participation. With new risk-based capital requirements forthcoming (most industry observers expect 2005), enhanced financial and risk management dynamics could make them very appealing. Reduced capital requirements as well as simplified hedging (vs. more labor-intensive and costly dynamic hedging for VAs) add to their appeal and potential growth. While not a current practice, an EIA can be used in a VA as a subaccount option. We are aware of one leading VA issuer who is actively exploring adding an EIA as an investment option within its VA. Additionally, if the overall appeal, and subsequent sales of this type of annuity, continues to grow, leading VA issuers who do not currently offer an EIA are likely to do so.

Inasmuch as the current equity market volatility did not begin until early March 2004, the investment allocations of total VA industry assets have not noticeably changed from our previous commentary. Overall, equity allocations remain high, reflecting last year’s tremendous performance gains. There was little change in the first quarter 2004 composition of VA sales channel distribution. After a significant rise in bank channel percentage of overall sales in 2003, first quarter fell by 1% to a share of 13%.

The percentage of non-group contracts in the first quarter offering one or more living benefits grew 3.4% to a total of 78.4% from year-end 2003. While 40% of last year’s new sales were in non-group contracts which had a GMWB, the number has increased to 50% for first quarter 2004. The percentage of first quarter new sales from contracts with a GMIB remains unchanged (52%) from 2003.

As the dynamics of the retirement income marketplace continue to evolve with the first wave of baby boomers beginning to retire in a few years, further development of hybrid products and the use of diversified annuity portfolios are likely scenarios. The annuity marketplace will continue to evolve to meet the challenges of the equity and fixed income marketplace. Changing investor sentiment and psychology, coupled with new suitability and compliance requirements, add to the complexity of best practice in product development.

Rick Carey 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 rcarey@finetre.com .


Reproduced from National Underwriter Edition, May 28, 2004. Copyright 2004 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.