VA Sales Rose 12% In First Quarter

As noted above, the best-performing VA contracts for 2003 feature opportunities for investors to enhance current income as well as take advantage of special liquidity and insurance features. Of the eight contracts noted above, half are L-shares, half are B-shares and half have bonus account payment features. These eight contracts all have death benefits with enhanced earnings benefit options and seven have guaranteed minimum income benefits.

Additionally, guaranteed interest accounts in VAs have become increasingly attractive as interest rate spread compression has lowered yields in fixed annuities. The shorter L-share and C-share contingent deferred sales charge (CDSC) periods make GIA interest rate payments very attractive as a competitive option to short maturity CDs, although many of the fixed accounts in these products have been closed due to concerns about persistency and the recovery of acquisition costs. Current competitive rates in GIAs and the ability to quickly transfer funds to variable investment options as equity market conditions improve are an attractive combination, even in the longer maturity B-share products.

VA sales by distribution channel have remained relatively static for the past year, with only minor changes taking place this quarter. Compared to the last calendar quarter, captive agency sales were unchanged at 35% and remain the largest of the sales channels. The second largest channel, independent NASD firms, gained a point this quarter, coming in at 27% of the distribution. New York wire houses were static at 13%, while regional firms lost a share point, coming in at 12%. Bank/credit union sales gained a point to close at 12%, while direct response lost a point to close at 1%.

The National Association for Variable Annuities released VARDS collected net flow statistics in early March for 2002. VA industry net flows increased slightly to $30.7 billion, up from 2001s net flow of $30 billion.

As we have noted in previous columns, the bottoming out of industry net flows and the move to a sustained increase would be a positive indicator reflecting improving health of the product line. We will watch with close interest this most important statistic, as this ever so slight increase was the first since 1997.

In late March, industry leaders attended NAVAs Retirement Income Conference, the primary focus of which was on the payout side of the annuity business. Current best practice and the ongoing challenges of communicating the benefits of annuitization to consumers and industry sales distribution channels remains perhaps the single greatest task facing the future success of annuities.

With many of the 77 million baby boomers starting to turn 60 in 2006, and almost $4 trillion of IRA dollars available for potential rollovers, the race is on to create fixed and VA products and sales systems to deliver a complex product. Yet to date the race is only among a small cadre of dedicated retirement income executives at a relatively small number of companies.

Total fixed and VA sales from immediate annuities and income riders from deferred contracts are very small (less than $7 billion) in comparison to new fixed and VA annual sales. The much-anticipated “Great Boom” ahead for payout annuity sales is like a mirage on a desert.

To the credit of the industry and those issuers actively engaged in the development and marketing of innovative income products, the effort is paying off in small but important ways. These products continue to build upon some of the major complaints both planners and customers have had about the payout side of the business, namely liquidity and commutation options.

Additionally, some of these newer generation products have instituted attractive enough compensation arrangements during the income or annuitized period to make it worthwhile for agents and distributors to sell the product. This is perhaps the most important bottom line development addressing the very real issue facing the growth of these products. Agents often joke about committing “annuicide” on their book of business by recommending a client annuititize their contract without any compensation paid to them for ongoing servicing and investment management.

It will also be critically important for product issuers to be in touch with the rapidly changing dynamics of consumer behavior and levels of financial risk assessment based upon age, ethnicity, gender, and socio-economic status. With less than 36 months until that leading edge of baby boomers begins retiring, issuers barely have enough lead time to validate and test the next generation of products.

The firms on the forefront of payout product design and compensation as well as consumer and agent education will more than likely be the leaders of the boom ahead.

Rick Carey is editor of the VARDS Report, a Roswell, Ga., publisher of annuity statistics, and managing director, professional services, for Info-One. He can be reached via e-mail at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 2, 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.