Year-to-date sales are minimally ahead of last year
By Rick Carey
Variable annuity sales momentum for 2004 dropped off substantially in the third quarter from the first half of the year. While this years VA sales are ahead of last year in the current year-to-date period, the margin is minimal.
Third-quarter year-to-date VA industry new sales of $97.4 billion posted a 4.3% increase over YTD sales for the same period last year, a ratio of 78% of last years new sales of $124.8 billion. Third-quarter new sales of $29.7 billion were slightly under the $31.4 billion in new sales for the same period in 2003.
Based on second-quarter YTD sales, VARDS had estimated a monthly sales benchmark of $11.4 billion for the third quarter. Third-quarter average monthly new sales of $9.9 billion were off by 13%. VA sales have not been below $10 billion for 2 or more consecutive months since January and February of 2003. VARDS currently estimates October sales at $9.5 billion, down 13.4% from the average new sales for the first 9 months of the year of $10.8 billion.
We estimate that VA industry total sales for 2004 will come in at approximately $128 billion. At that level, sales for the year would post an increase of less than 1.5%. Lackluster performances of the equities markets are largely to blame for the YTD falloff in sales. The S&P 500 and the NASDAQ OTC Composite had returns of 0.24% and 1.64% respectively. The Dow Jones Industrial Average was in negative territory with a -3.8% return. Heightened investor awareness of issues facing the investments markets from late trading investigations to industry sales practices have more likely than not put a damper on both new VA sales as well as 1035 exchanges. Likewise, increased regulatory attention on annuity industry suitability and compliance practices may be slowing the pace of new contract sales. Additionally, many broker-dealers have instituted new compliance and suitability practices this year, a process that may have further affected the pace of new contract sales.
The Top 25 VA issuers continue to consolidate their overall market share, up 1.3% in the YTD period to 95.3%. Thirteen firms posted positive changes in individual market share, while 12 posted negative growth. The Top 5 manufacturers with the largest percentage changes include Lincoln National (58.3%), Allianz (54.4%), Manulife/John Hancock (25.4%), Travelers (25.4%), and ING (21.3%).
VA industry total net assets for the period of $1.05 trillion are up 4.5% over year-end 2003. Among the Top 25 VA issuers, 72% have had a positive change in VA assets under management for the period. The 5 firms with the largest rate of asset growth include Allianz (28.3%), Jackson National (23.3%), Pacific Life (15.4%), MetLife/NEF/GenAm/MLI (12%), and Manulife/John Hancock (10.5%).
While new VA sales for 2004 look to post a slight increase over 2003, net flows are likely to fall below last years level of $46 billion. Third-quarter YTD net flows of $32 billion are 32.5% of YTD new sales. Net flow for the past 3 quarters has been $9.7 billion, $12.5 billion and $9.8 billion, respectively. This gauge of new money flowing into the industry has been a point of concern since net flows began a precipitous decline in 1997. Last years noticeable increase (up almost 50% over 2002) gave cause for cautious optimism that the tide might at last be turning for this important gauge of industry health.
The last time annual net flows as a percentage of new sales were above the 40% mark was 1999 at 40.9%. We note this as it represents a near-term threshold for the industry to achieve. Considering that annual net flows were as high as 92% of sales back in 1994, the 40% mark would be a minimum benchmark to work toward. The VA industry has yet to solve for making significant progress in bringing new money into the annuity marketplace.
The annuity industry is counting on increased usage of lifetime annuities from retiring baby boomers to have a positive impact on future net flows. The retirement income management movement could attract billions in new annuity investments as todays pre-retirees focus on the distribution phase of their lives. Additionally, Social Security reform could impact positively the increased use of lifetime annuities as either a voluntary or required investment option. The Wall Street Journal recently reported that “annuities are expected to have an important role in the Bush administrations plan to partially privatize Social Security with the establishment of personal accounts.” The Journal article also noted that some industry experts felt these accounts might require lifetime annuitization. Compulsory use of annuitization has been a cornerstone of the British pension system, where over half of the worlds lifetime annuity payments can be found.
VA industry sales reveal another trend that bears attention. The percentage of sales from qualified plans [401(k), 403(b), etc.] appears to be increasing. Historically the split has been roughly equal. Presently that split is 60/40 in favor of qualified sales. Whether qualified sales actually are rising or whether they have risen as a percentage because of nonqualified sales dropping off due to regulatory and compliance pressures remains a conjecture. The subject will be the focus of a new study to be featured in the VARDS Greenwald Strategy Service in early 2005.
We anticipate that this trend will continue and surmise that the annuity retirement income market will drive increased IRA rollover activity as well as 403(b) and 401(k) investments. Variable annuity 401(k) plans are very attractive alternatives for small- and medium-sized businesses, as they come with cost-effective third-party plan administration services. With rising health care employee benefit costs, these plans provide services which are well received by both employers and employees alike. It would not be surprising to see the qualified percentage of total new VA sales approach the 70% mark within the next 5 years.
This year has produced a number of notable product developments that could portend new trends for 2005. The first is the addition of exchange traded funds (ETFs) to a VA contract issued by Integrity Life Insurance Company. Since individual ETFs cannot be used as stand-alone funds inside a VA, Integrity has packaged the ETFs in a fund of funds format. This strategy meets the IRS diversification rules of Revenue Ruling 81-225. Integrity has used its wholly owned Touchstone Variable Series Trust in which to create the ETF fund of funds.
Exactly what are ETFs? According to the ETF Guide (available at www.etfguide.com), “Exchange traded funds are an emerging class of low cost index funds that trade like stocks. They can be bought and sold throughout the market day and offer portfolio exposure to the worlds leading indexes.” The Investment Company Institute says ETF asset growth since the end of 2000 is up 153.8% as of mid-year 2004, with ETF fund assets totaling $167 billion. Both investors and financial advisors have found ETFs to be a popular alternative to mutual funds and stocks. For VA investors, 2 of the most important benefits would be the lower expense ratios and access to a significant new investment class asset.