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Retirement Planning > Retirement Investing > Annuity Investing

VA Sales Lost Some Momentum In 3Q

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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, “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.

Integrity launched the ETF funds this past July with its IQ Advisor VA and ETF easyAnnuity. They consist of 4 fund of funds options to include a conservative allocation, moderate, aggressive and an enhanced version. The IQ Advisor offers other funds from name brand complexes such as Fidelity, Franklin Templeton, MFS, etc., while the easyAnnuity is exclusively ETFs. Due to the low costs of the ETF easyAnnuity, the product has been marketed to fee-based and fee-only RIAs. The issuer also has made the IQ Advisor available in a mutual fund wrap program launched earlier this year with Boston-based FundQuest.

Integrity has chosen to use the Barclays iShares ETF lineup in its 4 new Touchstone fund families. Barclays created the first index strategy in 1971 and currently has $1.2 trillion in worldwide assets under management. The iShares ETF family has nearly 100 individual ETFs available.

The second development worth noting has been the introduction of persistency rewards and annuitization bonuses. In an effort to impact annuitant behavior positively to annuitize deferred annuity contracts, some issuers have added annuitization bonus credits to VA contracts. Additionally, persistency rewards provide incentives to remain in contracts for specified lengths of time, thereby improving asset retention.

In the Sun Life Financial Masters IV and VII VA contracts, bonus payments will be made to the contract prior to annuitization, dependent upon the annuitants age and years the contract has been held since issue date. The annuitant must select a Life Annuity with a Guaranteed Certain Period of at least 10 years. As noted on the manufacturers VARDS Contract Data Profile, “to determine credit, Issuer determines contract value immediately prior to annuitization, subtracts purchase payments made within last 60 months, and then multiplies the difference by applicable bonus percentage; bonus percentage varies based on youngest annuitants age at contract issue and the number of years since issue.” Annuitizing at age 65 or less pays a bonus that is twice as much as annuitizing at 66 or older. For the 65-year-old, the payment schedule starts at 5% for a contract holding period of 5 years and rises by a percent per year to a maximum of 10% for 10 years or more. There is a fee for the benefit of .10% that is applicable only during the first 10 contract years or until annuitization, and the benefit may be terminated after election.

In addition to its own version of an annuitization bonus, the Protective Life Values Variable Annuity offers a persistency reward beginning on the 8th contract anniversary and each anniversary until annuitization. The issuer “will apply a reward to contract value equal to .50% of contract value as of that anniversary.” The Protective annuitization bonus has no charge, is awarded on or after the 10th contract anniversary, and requires either a Life Annuity or Life Annuity with Guaranteed Certain Period of at least 10 years. The Protective Annuity Value Bonus of 2% is based on the annuity value which equals the contract value at the date of annuitization less any remaining applicable contract charges to that date.

The third notable product development comes from Jefferson National in its Advantage Reward and Advantage Reward 2Plus2 VA contracts. These contracts now offer 2 new benefit options that couple a guaranteed minimum death benefit to a guaranteed minimum income benefit. As Frank OConnor notes in a recent issue of the VARDS Greenwald Strategy Service, “Structuring a death and living benefit in this manner has obvious advantages for risk managementone cannot exercise both a death and a living benefit, so one benefit essentially hedges the other.” VARDS data reveals that choosing this new combo feature will save money for those investors who might otherwise purchase these features separately.

The fourth development is the availability of dynamic asset allocation tools as an option in VA contracts. Last year the VARDS Greenwald Strategy Service featured research that confirmed that traditional ways of rebalancing were not the most effective in the wake of the bear market of 2000-2002. Dynamic and tactical asset allocation strategies are used by annuity insurers to hedge equity risk in risk management. VA investors now can use similar strategies to improve their risk-adjusted rates of return on variable annuity fund portfolios.

With dynamic asset allocation portfolios, assets are adjusted continually as markets rise and fall and the economy strengthens and weakens. Assets that are declining in value are sold and assets that are rising in value are purchased. This strategy is exactly opposite of a constant weighting strategy. Nationwides Americas Marketflex VA now offers the tool for an optional contract fee of .35%. The tool utilizes the Rydex Variable Trust funds. As with any benefit or option, the additional fees must be weighed against the potential benefits. In this case the combined fee for the tool and the Rydex fund fees place the additional cost above the average M&E fee for VA contracts.

Living benefits (the primary VA sales driver for the past few years) provide consumers with annuity insurance features that help solve many of the challenges facing investors in retirement income management planning. These benefits are particularly important for advisors and consumers alike who have chosen not to annuitize but are more comfortable using a combination of systematic withdrawals and living benefits to meet their income management needs. While the industry works toward greater use of lifetime annuitization through education and improved product design, annuity manufacturers continue to refine features and benefits to meet the wide range of situations faced by advisors.

Though the following product development example from MetLife is from a deferred fixed annuity, it is an example of an idea designed to appeal to the varied needs of the retirement income marketplace. The press release from this past September notes, “MetLife Introduces Longevity Insurance to Help Protect Against Outliving Retirement Savings in Later Years.” While the concept of longevity insurance is certainly not new (borrowing from terminal funding in pension plans), the concept addresses longevity and systematic withdrawal risk.

As noted above, the product is designed to appeal to advisors and their clients who are not ready to commit to investing in a lifetime payout annuity. Used in conjunction with systematic withdrawals, the new product produces an income stream that is more generous than a guaranteed income or withdrawal benefit from a VA. For a relatively small premium, the longevity insurance will generate a predetermined level of guaranteed income for life starting at a predetermined age. Use of the annuitys longevity insurance coupled with systematic withdrawals potentially allows for higher withdrawal rates than without the insurance.

As we look to 2005, we see several new trends developing. Perhaps the most important will be annuity issuer efforts to solve for simplification and increased transparency of products and benefit features. These efforts continue to address some of the most important issues raised in the wake of regulatory investigations into market timing and improper sales practices of both mutual funds and annuities. For example, some VA distributors feel that issuers have not done enough to assist in the development of benefit feature suitability guidelines for their products offerings.

VARDS Greenwald research from 2003 found that advisors are not as knowledgeable about VA features and benefits as they need to be. As we have noted in the past, product education has not kept pace with product and benefit proliferation. Current research confirms that the No. 1 issue of distributors is meeting compliance and suitability guidelines in the absence of definitive guidance, as proposed rules still are under regulatory review.

We anticipate a few top VA issuers will take a lead role in these simplification and product education/transparency efforts. In light of pending regulatory proposals like SEC Rule 33-8358 (more commonly referred to as the confirmation and transaction rule), these efforts represent a proactive stance on behalf of issuers and distributors. Other trends will include a marked increase in issuer and distributor efforts to penetrate the retirement income management marketplace. The number of firms rolling out formalized programs and advertising as well as new retirement products and services will grow noticeably. These developments will make initiatives to improve simplification and transparency all the more important as new products and features come to an already crowded market.

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 [email protected].

Reproduced from National Underwriter Edition, December 10, 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.


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