Are VA Sales Heading For A $150 Billion Year?

Net flows in 2006, while not large enough to be considered definitive evidence of a significant increase in new money being attracted to variable annuities, are certainly much improved from 2005 levels. Year-to-date net flow is estimated at $15.2 billion vs. $10 billion as of the year-to-date period ending June 30, 2005, a 52% increase on a nominal basis. Net flows were 19.5% of 6/30/06 year-to-date new sales, vs. 15.5% of 6/30/05 year-to-date new sales.

While a little less rosy a picture than the comparison of net flows on an absolute basis, a 24.8% increase in net flow relative to new sales still represents healthy growth, albeit with net flows still much lower than new sales. This situation forces the acceptance of 1 of 2 explanations: either exchanges are such a large part of industry sales that the ratio of net flows to new money is actually much higher than implied by the calculation used here, or surrenders plus benefit payments are extremely high.

So why have VA sales increased so dramatically in 2006? As the mostly B-share contracts sold in 2000 come completely out of their surrender charge period at the same time as a lot of L-shares sold in subsequent years, increased exchange activity is almost certainly accounting for some of the increase, and perhaps a great deal of it. But there continues to be growing anecdotal evidence (such as favorable comments in the popular press) that variable annuity products are having increasing appeal, mostly due to living benefits, which is certainly not news.

With sales hitting record levels this year in the midst of a great deal of uncertainty about investment returns and overall economic conditions, postulating that the appeal of living benefits is being fueled by this uncertainty makes intuitive sense, especially given the increasingly favorable demographic environment for annuity products in general.

The industry is entering a new era for variable annuities, one in which income, rather than accumulation, is the primary driver of sales, and the demand will be skewed toward those groups of retirees and near-retirees that seek the seemingly oxymoronic simple complexity. A variable annuity product representing multiple asset classes and protecting against loss with a living benefit is inherently complex, and the companies with the products, and perhaps more importantly the people, that can deliver not only the product, but also the concept, effectively and simply will be the winners.