New sales (excluding internal VA to VA exchanges) of variable annuities totaled $154.9 billion in 2006, an amount that was in line with earlier projections and that represented just under an 18% increase over 2005 new sales of $131.4 billion.
Contrast this with 2005, when the year over year increase was only 2.3%, from $128.5 billion in 2004 new sales.
Assets under management in VA products increased significantly as well, from $1.187 trillion to $1.357 trillion, or an increase of approximately 14%.
Examining only these 2 data categories would lead one to conclude that the VA industry is healthy and growing rapidly, but the cloud behind this silver lining is the net cash flow data, which indicates that 1035 exchanges are a large component of sales growth. Asset growth, of course, has been primarily driven by equity market returns.
Net flow in 2006 was $29.7 billion, or just 19.2% of new sales. Granted, this is a significant increase over 2005, when net flow was only $20.4 billion, or 15.5% of new sales. But these numbers also fall far short of 2003 and 2004 levels, when net flow was 37% and 31.3% of new sales, respectively.
The following paragraphs will examine some of the underlying factors driving this disconnect between product sales and net new dollars.
Demographic trends, retirement risks and the evolution of living benefits from simple models, such as guaranteed return of principal, to complex designs addressing a multiplicity of risks are starting to change the perception of the variable annuity. This has reached a point where there is more balanced treatment in the popular financial press, where at least some discussion of the value of living benefit guarantees accompanies the standard reproach regarding high fees.
For many boomer retirees who have not saved adequately, or, perhaps more to the point, who have income expectations that cannot be met by their savings, assuming current fixed income returns, variable annuity living benefits can be an effective part of the overall income strategy–a concept that is increasingly embraced by advisors and financial journalists.