New sales of $31.3 billion were 9% lower than 1Q 2004
First quarter 2005 new variable annuity sales of $31.3 billion posted a 9% decline from first quarter 2004 sales of $34.4 billion. In contrast to a stellar stock market in 2003, which carried positive investor sentiment and equity sales momentum forward into early 2004, last year’s market performance was relatively flat for most of the year despite a rally late in the year.
Additionally, some major distribution channels reported a decline in advisors’ enthusiasm to sell the product due to increasing concerns with suitability and compliance issues. While we have no accurate measurements of the potential effects of the increase in negative financial press that appeared last year, we can’t rule out the role these events may play in the sentiment and subsequent actions of advisors and clients.
For the second year in a row the North American Securities Administrators Association placed VA sales practices on its list of Top 10 Threats to Investors.
Total first quarter VA assets of $1.1 trillion declined by $20.8 billion, off 1.9% from year-end 2004. The first quarter 2005 net flow estimate of $4.8 billion is 11.9% of last year’s total net flow of $40.2 billion. The downward trend in annual net flow, which began in earnest in 1997 only to rise in 2002 and 2003, appears to have resumed, having declined 12.6% at the end of 2004 from 2003. The current quarter figure would seem to indicate this year’s annual net flow could be in the declining year category. Should that occur, annual VA industry net flow since 1997 will have declined 75% of the time, while rising the other 25%.
In 1997, net flow as a percentage of new sales was an estimated 71.4%. Last year it was 31.3%. The current quarter’s net flow ratio to new sales is 15.3%. Net flow is an indicator of new monies coming into the industry.
While it might have appeared at the end of 2003 that the prevalent downward trend of industrywide net flow had reversed, it seems that may have been wishful thinking. One interesting note regarding net flow appears to be the initiative some individual VA issuers have taken to issue press releases touting not their new VA sales, but their sales ranking based upon their net flow as it appears in VARDS online research reports.
While industry net flow has declined, record new sales in 2004 of $128.4 billion continue to attest to annuity buyers’ intense interest in “upgrading” their products. Whether looking for more cost-effective products, products with better overall investment options, or products with protection features offered in the vast array of living benefits, today’s VAs have hit the right chord with many of these buyers.
The increase in the development of new features and investment options shows no sign of letting up anytime soon. For example, the advent of the guaranteed minimum withdrawal benefit’s newest cousin, the GMWB for Life, is a feature of the number one and two VA contracts this quarter in the category of Top 25 VA non-group contracts. Both the Jackson National Perspective II Fixed and Variable Annuity and the John Hancock Venture III have the GMWB for life. Since the end of last year, four contracts in this group added a “for life GMWB” and one added a GMWB. Only two contracts in this group do not sport a GMWB feature.
The GMWB living benefit is the most important VA feature development since the introduction of the bonus product. Today the GMWB feature is not only commonplace, it is the primary feature driving sales. No other feature in the history of the VA market has the potential to impact the future of the industry as does this singular feature! As such, its impact and implications are of prime importance going forward.
Another important area of product development driving consumer interest in VAs is in the addition of new investment fund options. From fund-of-funds, to Exchange Traded Funds, to the growing interest in lifestyle funds, VA issuers are bringing an enhanced array of investment features to their products. While we have noted and discussed ETFs in previous installments, investors made these funds the fastest growing last year in the overall fund industry, according to the Investment Company Institute. Last year ETFs attracted net inflow of $55 billion as their assets grew to $226 billion, a blistering growth rate of 50%. While that figure is still a small percentage of the overall $7 trillion in mutual funds assets, the growth of net inflow is highly significant. This interest should bode well for fund investors interested in annuities.
While not an entirely new concept, lifestyle funds and new portfolio investment management techniques are enjoying a surge in popularity. In April, ING noted that “about 33%” of newly issued VA contracts have investors choosing the fund-of-fund subaccounts. ING introduced its lifestyle portfolios in May 2004.
Last March, Fidelity announced the launch of seven new fund-of-funds lifestyle portfolios–Variable Insurance Product funds (VIP Freedom Funds). The portfolios are targeted by the investors’ expected retirement date. Before the target retirement date is reached, the fund will close out and be merged into the more conservative VIP Freedom Income portfolio. Unlike traditional asset allocation strategies which have static “conservative,” “growth,” or “aggressive” allocations, lifestyle fund allocations are not static and change over time to become more conservative.