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Fixed annuity sales set yet another single-quarter record in the third quarter of 2002 with $30 billion in overall fixed annuity sales.

The third quarter marked the seventh straight quarterly increase in fixed annuity sales and the sixth straight quarter in which a new quarterly record was established for fixed annuity sales.

The continuing string of increasing sales is all the more remarkable considering the current interest rate environment. The average annuity interest rate as reported in LIMRA Internationals U.S. Individual Annuities survey hovered near 5% during each month this year before dropping each month in the third quarter to an all-time low of 4.49% in September.

The squeeze between contractually guaranteed minimum interest rates and market rates was definitely being felt as many companies halted sales of short-term interest guarantee periods, and some sought a lower minimum guaranteed interest rate below the 3% typically seen in fixed annuity contracts.

The strong appeal of a fixed return has impacted variable annuity sales, as well. Forty-five percent of new VA premium was initially placed in fixed subaccounts during the third quarter.

It is not unprecedented for fixed subaccount new premium to equal or even surpass new premium directly placed into variable separate accounts. However, 11 years ago was the last time that the portion of new VA premium put in fixed subaccounts reached 45%. While VAs continue to outsell fixed annuities, the total dollars of new money going directly into variable separate accounts in the third quarter was the lowest amount since the fourth quarter of 1996.

Fixed deferred annuities comprised 92% of fixed annuity sales in the third quarter, with sales totaling $27.6 billion. This represented a 63% increase over the third quarter 2001. Equity indexed products recorded the largest increase, jumping 88%. Market value adjusted annuities and book value deferred increased 61% and 60%, respectively, when comparing third quarter 2002 to the same quarter of the prior year.

The remaining 8% of fixed annuity sales came from immediate annuities and structured settlements. Fixed immediate annuities increased 44%, while structured settlements premium decreased 21% compared to the third quarter of 2001. As a result, fixed immediate annuities finished the third quarter with $1.3 billion in sales and structured settlements premium dropped to $1.1 billion.

Looking at fixed annuity sales by distribution channel, the third quarter year-to-date data shows little change in market share from 2001. The two largest sellers of fixed annuities combined, independent agents and banks, account for 76% of all fixed annuities sales.

Through September, independent agents had sold $34.3 billion and banks $28.5 billion. The remaining $19.7 billion in fixed annuity sales came mostly from career agents and stockbrokers, who sold $9.4 billion and $5.4 billion, respectively, while direct response and other systems combined for $4.9 billion in fixed annuity sales.

Whats next for annuities? Will the recent improvement in the equity markets signal a shift in sales away from the guaranteed returns in fixed annuities, or will a third consecutive year of decline in the equity markets keep fixed annuities selling at record pace? Can the fixed annuity product thrive even as the interest rate environment presents greater challenges to maintaining profitability?

The difficulty in answering these questions lies in the uncertainty of the markets. That same uncertainty raises the value of the guarantees annuities offer.

Dan Q. Beatrice, ACS, AIAA, is an analyst in the Retirement Research center at LIMRA International, Windsor, Conn. His e-mail address is dbeatrice@limra.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 30, 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.