Positive returns in equity investments also shifted VA asset allocation away from fixed/GIA, bond and money market subaccounts for the first time in several quarters. Equity-based assets grew from 45.6% of total assets on March 31, 2003, to just under 49% as of June 30. Over the same period, fixed/GIA assets–which have risen or remained flat in almost every quarter since the end of 2000–declined to 28.8% of assets from 31% on March 31, 2003.
In the category of VA sales by distribution channel, it is worth noting that bank/credit union sales have shown a steady percentage increase since the beginning of 2003. At the end of the fourth quarter 2002, their market share of total VA sales was 11%. At the close of the second quarter YTD period, that share had risen to 14%. Every channel had been static, either having gained or lost a point over the period. The largest channel, the captive agency group, lost a point this quarter to close at a 34% market share. The second largest channel, independent NASD firms, also lost a point to close the midyear period at a 26% share. Regional investment firms gained a point to close at 13%, while New York wire houses lost a point to close at 12%. Direct response remained static at 1%.
The National Association for Variable Annuities released VARDS-collected industry net flow statistics for the June 30, 2003, period of $32.6 billion, which scored a healthy 10% increase over the end of the first quarter. Over the past five quarters, industrywide net flows have averaged $28.8 billion per quarter.
This is another notable statistic that bodes well for the industry; if sustained, this could mark the beginning of a confirmed uptrend in VA industry net flows.
In 1997, VA industry net flows began a sustained downturn, hitting their lowest point at the end of 2001 ($30 billion). They rose slightly at the end of 2002 to close at $30.7 billion. The current midyear sales ratio of 63.8% is a very positive development for the VA industry, one that portends a marked improvement for 2003.
As noted above, the discernable shift in the sales fortunes of the VA industry has come as the result of a confirmed equities market rally since mid-March and investors growing interest in the insurance features of variable annuities. From real-life death benefit guarantees paid out in the bear market to the rising interest in GMIBs, GMWBs and GMABs, the focus on insurance vs. tax-deferral is the trend of the present and future.
This renewed focus on the insurance aspects of the product will continue to build as the leading edge of 77 million baby boomers begin turning 60 in less than 36 months. The largest generation of recent history will be living longer, will have saved less and will be the first to change from defined benefits plan payouts to reliance on defined contribution payouts.
Over the next five years, the focus on the payout or distribution side of the VA business will continue to present significant upside growth opportunities as the challenges of the new retirement generation begin to affect an ever-increasing number of retirees. The number of Americans age 65 and older is expected to grow to 53.3 million by the year 2020, up 51% from 35.3 million in 2000.
According to the 2002 NAVA Survey of Non-Annuity Owners (conducted by Greenwald & Associates), only two of five individuals have tried to figure out how much money they would need to save for retirement. In addition, according to the Congressional Research Services "Retirement Savings and Household Wealth in 2000: Analysis of Census Bureau Data," the median household wealth (including home equity) for 55-64 year-olds was $273,760 with median debt of $36,400. Faced with these statistics, there is a growing concern that we are headed for a retirement income crisis of considerable proportion. This crisis presents significant opportunity for annuity issuers and distributors.
While declining revenues from depressed equity account values were the focus of last years woes, low interest rates and spread compression are the key stories of 2003. According to the Advantage Group, fixed annuity sales increased by 80% in 2002, setting the stage for great expectations in 2003. Those expectations have not materialized, however, as the investment spread between what insurers can offer policyholders and what they can earn on their investment portfolios has declined severely. With five-year U.S. Treasury bond rates falling below 2.5%–and with state-mandated minimum annuity required interest rates of 3% still in place for about half of the states–investment margins will not support profitable products. While half of states have lowered their minimum nonforfeiture rates to 1.5%, many potential buyers are not willing to lock in contracts at such low rates. In addition, insurers have been hit hard over the past two years with record corporate bond defaults. According to S&P, in 2002, corporate borrowers defaulted on a record $178 billion in debt securities. While these high levels of default have slowed substantially this year, improvements to the credit quality of the bond market will be slow in coming.
It would appear that a return to higher interest rates would solve many of the problems annuity issuers face today. In actuality the reverse is true, as many fixed-annuity policyholders would be expected to cash out their policies to chase the higher returns. Issuers would then be faced with the potential liquidation of investment credit and debt assets at depressed prices. For the rating agencies, rapidly rising interest rates represent a substantial risk for the insurance industry. As they note, insurers are stuck "between the rock of low interest rates and the hard place of rapidly rising ones."
Many financial pundits continue to prognosticate about a growing economy in the third and fourth quarters of 2003, and we also see continued good news for the VA industry. Second quarter numbers could mark the turning point for this industry going forward.
is editor of The VARDS Report, a Roswell, Ga., publisher of annuity statistics, and managing director VARDS, for AnnuityNet/VARDS.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 1, 2003. Copyright 2003 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.
