After record-breaking first quarter new sales of $34.4 billion, variable annuity second quarter new sales fell 4% to $33 billion.
Year-to-date new sales of $67.4 billion are 54.7% of last year?s new sales of $124.8 billion and represent an 8.7% increase over year-to-date new sales for the same period a year ago. Year-to-date total net industry assets closed at $1.05 trillion, up 1.75% over first quarter assets of $1.03 trillion.
The recovery of the equities markets in 2003 faltered in early March as concerns over rising interest rates, oil prices and the war on terrorism brought single-digit declines in the major market equity indexes as the quarter came to a close. Concerns over first quarter corporate earnings sent the major market indexes into negative territory again in April. They recovered in June, enabling the S&P 500 and the NASDAQ Composite to post mildly positive year-to-date returns of 2.6% and 2.2%, respectively. The Dow Jones Industrial Average lost .18%.
As we began the third quarter, lower than expected corporate earnings for the technology sector continued to drive the equity markets lower in July, with the NASDAQ posting the most significant losses. As of early August, the year-to-date returns for the NASDAQ Composite, the S&P 500 and the DJIA are -11%, -3.2% and -4.9%, respectively.
This year?s equity market performance is in marked contrast to last year?s stellar double-digit positive performance. Profit warnings, terrorist concerns, Iraq, rising interest rates and commodity prices all continue to dominate investor psychology. Concerns with the performance of the equities markets, as well as the costs in time and public perception to address the heightened regulatory focus on suitability and compliance, have prompted some VA issuers to forecast lower than expected sales for 2004.
Inasmuch as equity market performance is the final arbiter of sales success or failure in the VA marketplace, net flow is the barometer of the underlying health of the industry. For the industry, it is the gauge of new money coming into the industry, as opposed to money already inside the industry flowing between companies in the form of 1035 exchanges or heightened surrender activity.
In 2003 the industry witnessed the most significant annual growth of net flow (by percentage) since 1994, up 49.8% over 2002. While first quarter 2004 net flow of $9.7 billion was down 26% over the same quarter in 2003, second quarter?s net flow of $12.5 billion was down only 4.6% over the same quarter in 2003. Year-to-date 2004 total net flow of $22.2 billion is 48.3% of last year?s level of $46 billion. Considering the state of the equities markets and the extensive press coverage given to the industry?s late trading and compliance and suitability issues, VA industry net flow remains on a positive footing.
The VA industry issuer landscape continues to consolidate. With MONY announcing the completion of its merger with AXA Financial in July and the April completion of the Manulife acquisition and integration of John Hancock Financial Services, the industry has 2 fewer VA issuers. Lower profit margins from asset accumulation products demand maximization of economies of scale, which will continue to foster even more industry consolidation. Rising costs to meet increasing suitability and compliance requirements, coupled with pending implementation of new risk-based capital requirements, add additional pressure for smaller VA market share issuers to maximize profit margins and shareholder valuations.
Sixteen of the current 53 VA issuers (30%) hold less than $2 billion in individual total VA net assets, and the Top 25 VA issuers? market share of total new sales continues to rise?it is now at 95%. Excluding the assets of TIAA-CREF, average VA assets for a Top 25 VA issuer are $27 billion, and for a Top 10 VA Issuer, $49 billion. Unless the anticipated VA life annuity retirement income market boom materializes sooner than later, 28 issuers sharing the remaining 5% in sales market share seems questionable over the long term.
For customers, the benefits of consolidation should come in more favorably priced products. For the industry, product consolidation, while potentially cutting the choices available, could lead to increased sales compensation from efficiencies in economies of scale. Enhanced compensation packages are especially important for the success of life annuity sales.
For VA issuers, one measure of sales success is the quarterly sales ratio. As of mid-year 2004, 17 of the Top 25 VA issuers (68%) had sales ratios of 50% or higher. Seven firms had sales ratios of 60% or higher. Of this group, Lincoln National?s 80.6% sales ratio was the highest, followed by Allianz at 80%. These 2 companies also have the 2 highest percentage changes in sales for the annual year-to-date period ending 6/30/04 at 93.8% and 76.2%, respectively.
Other VA issuers in this group of 60% plus year-to-date sales ratios (listed by %) include Manulife/John Hancock (67.3%), Travelers Life and Annuity (65.6%), ING (63%), Prudential/American Skandia (61%), and Northwestern Mutual (61%).
Over the past year ending 6/30/04, 17 of the Top 25 VA issuers had increases in sales ranging from 93.8% to 1.1%. The remaining 8 issuers had decreases in sales ranging from -1.2% to as much as -57.7%. Explanations for a loss in sales over the period range from dropping or decreasing product benefits (especially living or death benefits), realignment of product distribution, closing of products and increased surrenders (especially from C-shares), and loss of investor confidence and distributor loyalty due to heightened exposure from market-timing and sales practice issues.