Third Quarter VA Sales Up 7.8% Over Last Year To $27.7 Billion

With this report we have included a pie chart illustrating industry new sales broken out by share class type in the VARDS Non-Group Open category. This category excludes closed and group registered VA contracts.

The current quarters Top 25 VA contracts share class breakout holds 5 L-share products (20%), 1 C-share product (4%) and 19 B-share products (76%).

The effects of both capital transfers and market appreciation/depreciation are evident in a comparison of third-quarter VA industry assets by investment objective to year-end 2001. For example, the market share of assets held in the fixed/general interest accounts is presently 29.7% compared to 22.2% at the end of last year.

The next largest category by market share is that of the growth and income funds, which has fallen to 20.3% from 23.9% at the end of last year. Growth funds have fallen to 15% from 18.8%, while the balance of all other equity funds has fallen from 16% to the present 12%. Money market funds have grown slightly, up a little over 1 percent, while the combined bond and fixed income sectors have grown a little over 3%. Balanced/asset allocation funds have grown by just over a quarter of a percent.

As noted in this report last quarter, the impact of the extended bear market on the fee-generating asset bases of variable product issuers has led to a host of credit watches and downgrades. Expanded coverage of myriad financial issues in the press, from negative money market returns in a growing number of VA contracts to calls for greater risk-based financial disclosure and tighter accounting standards, have prompted new dialogues and needs-based solution discussions across the industry.

In the Aug. 12, 2002 National Underwriter, Tim Pfeifer wrote a market analysis titled, "Despite The Market, Silver Linings Exist For The VA And VL Community." In that article he addresses the need for issuers to create product designs that will protect against major market downturns and noted that a few had already begun the process. He writes, "One example is to define policy charges as a percentage of premiums or benefit base, not account value. Further, charges for guaranteed minimum death or living benefits could be assessed on a per-$1-of-amount-at-risk basis. This would make charges higher when the risk is higher, as opposed to many guaranteed benefits today, which have a high charge when the risk is low and vice versa. Also, mortality and expense and asset management charges may be tiered based upon subaccount or policy performance. Designs that mitigate insurers downside risks can conversely allow for features benefiting the policyholder, especially in bull markets."

Reading the signs and portents of the variable annuity industry as it works its way through the issues brought to light by the bear market, it seems evident that the stage is being set for a fundamental debate regarding historic business models and their metrics. The pressures on public companies today to solve for improved shareholder equity and earnings will ultimately spur some issuers to become early adopters of a "Smarter" pricing model, as noted by Pfeifer.

I believe this re-tooling effort will become the major force behind the battle for improved financial dynamics within the variable products industry, and all but guarantees continued product proliferation.

For the Top 25 VA contracts and their issuers, the stage is set for new opportunity and leader board movement in the next few years as issuers address the challenges ahead.

is editor of the VARDS Report, a Roswell, Ga., publisher of annuity statistics, and managing director, professional services, for Info-One.

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 2, 2002. Copyright 2002 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.