Fixed Annuity Sales Hit Record $71.5 Billion In 2001

Sales of fixed annuities reached an all-time record of $71.5 billion in 2001, growing at a 36% clip, according to preliminary estimates just out from LIMRA International, Windsor, Conn.

The growth rate accelerated during the year, despite annuity interest rates falling nearly a full percentage point from December 2000 to December 2001. Comparing quarterly results, 2001 to 2000, fixed annuity sales grew by 15% in the 1st quarter, increasing to 73% in the 4th quarter.

FA sales have actually been on the rise since 1998, which had the lowest sales since 1987.

This steady growth involves all types of FAs. Book value deferred annuities grew 45%, faster than any other type of FA (see chart). Market value adjusted annuities growth slowed in 2001 after nearly doubling during each of the previous two years. In the first half of 2001, sales of payout products–immediate annuities and structured settlements–increased rapidly; however, during the second half, their sales were relatively flat, ending the year at $3.4 billion and $6.3 billion, respectively.

Sales of variable annuities, on the other hand, declined 18%, ending the year at $112.8 billion. This, after five consecutive record sales years. The only VA growth area last year was in VA fixed accounts, which grew 15%.

Total annuity sales–FAs and VAs combined–fell just 3% last year from $189.9 billion in 2000 to $184.3 billion last year.

Although FA sales came close to topping VA sales in 1995, the last time they did in fact exceed VA sales was in 1992, fully 10 years ago.

While all distribution channels increased their FA sales last year, banks grew the fastest, ending the year more than 60% higher than in 2000. Stockbrokers posted the second fastest growth of 37%, followed by independent agents, whose sales grew 28%.

Even though independent agents were the third fastest growing channel, they remain, as they have for years, the largest fixed annuity distribution channel. However, their market share has been relatively stable, while banks have been steadily gaining on them and career agents share continues to fall.

Perhaps interest rates, though falling, led to much of the bank channel success in FA sales last year. The Federal Reserve cut its Federal Funds Rate 11 times last year, resulting in a combined 4.75% decline in that rate.

Since longer term bond yields were relatively stable during the year, the yield curve significantly steepened. This may explain why annuity rates compared very favorably to bank CD rates last year. Also, with stock prices falling for their second year in a row, many investors may view a fixed-rate product (even at lower yields) as favorable.

The question, going forward, is, will fixed annuities sustain their momentum? LIMRA predicts that annuity sales will resume their growth in 2002. How much of this growth will go to FAs and VAs will depend on the speed and extent of any economic recovery and the resultant impact on stock prices and interest rates.

For now, the increased attention to FAs by sellers and manufacturers will have a positive influence on FA sales in the near term.

Eric T. Sondergeld, ASA, CFA, MAAA, is corporate vice president and director of the Retirement Research Center at LIMRA International, Windsor, Conn. His e-mail is esondergeld@limra.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, March 18, 2002. Copyright 2002 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.


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