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Sales have been trending downward since May 2008, and if the slide continues, fourth-quarter sales may fall to $30 billion, wrote Frank O'Connor, director of insurance solutions for Morningstar, in a report on the quarter's results. The last time industry sales were below $30 billion was six years ago, in the third quarter of 2002, he wrote.
In 2008, the Dow Jones Industrial Average lost 33.8%, the third-worst performance in its history and the worst since suffering a drop of 52.7% in 1931.
The declines and volatility in the U.S. stock market have had many life insurers on alert as their most-promoted products such as variable annuities, pitched to people nearing or in retirement, are linked to equity-market performance. Experts predicted last fall that if stock markets continued their descent, life insurers are likely to see lower sales of these retirement-income products (BestWire, Sept. 17, 2008).
"The modern variable annuity industry has never traversed a market and economic environment like this one," O'Connor wrote. "Not only is the industry faced with devastating losses in virtually every asset class, the volatility of returns is in uncharted territory as well. With volatility increasing the cost of options and [an] ever greater number of VA investors with 'in the money' guarantees, the future looks challenging."
For sales by individual company, Morningstar does not release data by quarter, but on a year-to-date basis. Through the first nine months of 2008, TIAA-CREF captured the No. 1 spot with $10.8 billion in sales. MetLife came in second place with sales of $10.5 billion; ranking third was Axa Financial/MONY with $10.3 billion in sales, while ING Group of Companies took fourth place with sales of $10 billion. Rounding out the top five was Lincoln National Life Insurance Co., with year-to-date sales of $8.8 billion, according to Morningstar.
In the third quarter, the VA business of some big industry names was hit hard (BestWire, Nov. 24, 2008). Several companies took millions in charge-offs for the cost of acquiring new business and saw higher costs for hedging against risks associated with the guarantees offered to policyholders.
"Living benefit" riders, such as the guaranteed minimum withdrawal benefit and the guaranteed minimum income benefit, for example, are intended to protect VA policyholders against downside market risk.
The cost of living benefits will increase and the value of the guarantees will decrease, such as lower withdrawal rates and/or tighter restrictions on asset allocation, O'Connor predicted. However, "if there is a silver lining, it is the opportunity to put renewed vigor into raising investor awareness of the valuable role variable annuities can play in protecting wealth," he wrote.
Net sales, as opposed to total sales, meanwhile, are a key measurement because they show whether "new money" is being invested into VAs instead of people simply exchanging their money from one annuity contract to another. Third-quarter net sales declined 47.3% to $4.9 billion, representing 13.1% of total sales, according to NAVA and Morningstar.
Restoring consumer confidence in variable annuities is a top goal of Catherine J. Weatherford, president and chief executive officer of NAVA, the Association for Insured Retirement Solutions. Over the past several months, consumer confidence in the financial markets has crumbled ? putting a damper on annuity markets, Weatherford said in a recent interview with BestWire (BestWire, Nov. 24, 2008).
Combined, the net assets of variable annuities fell 13.2% to $1.3 trillion at the end of the third quarter.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
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