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These gains came during a bumpy year for the equities markets, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite posting returns of 3.1%, 10.8%, and 8.6%, respectively--after a significant amount of volatility during the first half of the year.
While 60% of the top 20 issuers in 2004 surpassed their 2003 sales records, five issuers did so with new sales ratios in excess of 125%: ING, Lincoln National, John Hancock Life, Travelers Life and Annuity, and Allianz Life. Firms in the top 20 that made the biggest improvement in 2004 were Lincoln National, which moved from 11 to 7, and Allianz Life, which moved from 16 to 13.
The dominant sales driver for variable annuities in 2004 was the guaranteed minimum withdrawal benefit (GMWB), which a growing number of contracts offered. In 2003, 40% of all new sales (from non-group products) were from products that offered the feature. In 2004, that figure jumped to 69%. Contrast that with a substantial decline in the share of contracts that offered a guaranteed minimum income benefit--just 43% in 2004, down from 52% in 2003.
The GMWB is seen today as a viable long-term lifetime "income" benefit, instead of actual contract annuitization or purchase of an immediate variable annuity (IVA). In in-depth interviews conducted by the VARDS Greenwald Strategy Service in January 2005, many advisers actually called the use of a GMWB "annuitization." Even insurance company executives have been quoted in recent press articles referring to GMWB usage as a "kind of annuitization."
Adding to the momentum of growing interest in GMWB contract benefits was the introduction last fall by Jackson National of a stand-alone GMWB "for life" feature. Unlike the standard version of a GMWB, this newest cousin guarantees a percentage withdrawal for the life of the annuitant regardless of account value. Standard GMWBs generally provide withdrawal benefits only up to the value of the principal or until the account value reaches zero. After the introduction of the standalone GMWB for life, 2005 will see the widespread addition of GMWB-for-life features to the majority of products.
Most advisers today see recommending GMWB for life as an alternative to true annuitization of deferred contracts or the purchase of IVAs to solve income distribution management problems. Complicated explanations of the mechanics of variable annuitization are not necessary, and deferred contracts paying 5% to 7% commissions are more attractive to commission-based advisers than contracts that, for the most part, provide little or no compensation upon annuitization.
But these features have long-term implications. Some argue that the GMWB is a bridge to a greater understanding and use of lifetime payouts, and that it will pave the way for more IVAs and true annuitization of existing deferred contracts. Yet there is concern that, should millions of Americans choose to utilize the GMWB-for-life benefit instead of IVA purchases or true contract annuitization, the ultimate cost to issuers in reserving for the feature could jeopardize the financial stability of the industry.
Another 2004 trend was the growth of real-estate specialty subaccounts. Total net assets in this category grew by almost 300% over the past 60 months, to total 1.7% of the industry's net assets. The top 10 leading issuers (ranked in order of real-estate subaccount assets) were TIAA-CREF, Pacific Life, ING, Nationwide, Aegon, IDS, Prudential/Skandia, John Hancock, Lincoln National, and Allianz.
Overall, net flows in 2004--31.2% of total new sales--didn't measure up to those of 2003, when they were 37% of total new sales. Net flows--new dollars coming into the variable annuity marketplace--are a measure of the health of the industry. FP
Rick Carey, based in Roswell, Ga., is founder of VARDS (Variable Annuity Research and Data Service) and co-manager of VARDS Greenwald Strategy Service, products of Morningstar. Carey can be reached at rick.carey@morningstar.com.
