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Third quarter 2003 index annuity sales were off by 13% from the 2nd quarter 2003, and by 13% from the 3rd quarter a year ago, reports The Advantage Group, St Louis.

Nonetheless, sales for the year are strong, says Jack Marrion, president of the research firm. For 2003s first 3 quarters, he says, index annuity sales reached nearly $10.2 billion, not far off total sales for all of 2002, which were a record $11.7 billion.

“Well have another record year in 2004,” Marrion predicts.

The figures are based on sales of 31 index annuity insurers. The results for 2 of the 31 are estimated.

The figures represent 97% of the active index product companies, accounting for over 99% of sales, according to Marrion.

Ranked by sales, the top 5 companies in the 3rd quarter were, in descending order, Allianz, AmerUs Group, American Equity, National Western and Midland National. These companies represent 62% of the total index annuity market share, according to The Advantage Group.

Allianz, AmerUs and American Equity held the top 3 slots in all 3 quarters of 2003, says the index annuity tracking service. In the 3rd quarter, their combined market share was 52%.

The 3rd quarter 2003 sales came to nearly $3.2 billion, trailing the record-breaking 2nd quarter of $3.7 billion.

What accounts for the falloff? In the early part of the 3rd quarter, most of the carriers were pulling older products from the market, suggests Marrion. These were index annuities that had minimum interest guarantees of 3%–a figure widely considered to be too high in todays low interest rate environment.

Most companies did replace these products with lower minimum guarantee products, Marrion says, but the transition happened gradually. That means, for a time in the 3rd quarter, the number of competitive index products available for sale was limited, he says.

That cut into sales. So did efforts of some carriers who, to deter sales of their higher minimum guarantee products, priced those products at unattractive levels, he says.

In addition, in the 3rd quarter, some producers began increasing the amount of sales they were doing in traditional fixed annuities, says Marrion.

There was “a modest type of fire sale going on,” he explains. “What I am hearing is that clients started choosing to buy traditional fixed annuity products that still had the 3% minimum interest guarantees in them. They wanted to get the best minimum rate available.”

The traditional fixed annuities seemed especially attractive in the period, he adds, because their crediting rates “started showing marginal improvement or at least no further decreases.”

In terms of index annuity product trends for the 3rd quarter, Marrion says the most notable are the following:

Shorter surrender periods. For the first time since the 3rd quarter of 2000, less than half the sales went into index annuities having surrender periods of 10 years or more (see chart 1). In the 3rd quarter of 2002, more than 70% of index annuities had surrender periods of 10 years or more.

“Products with longer surrender periods are still available,” says Marrion, “but their commissions dropped in the 3rd quarter. In response, producers started gravitating toward products having shorter surrender periods but commissions that are comparable to those of longer surrender period products.”

Lower commissions. In the 3rd quarter 2003, index annuity commissions dropped significantly, particularly on the longer surrender charge products, says Marrion.

The large majority of index products paid 7%-10% commissions in the period. This was down from the 3rd quarter of 2002, when the majority of policies paid 9%-11+% commissions. (See chart 2.)

“The index carriers, like other insurers, were squeezed by the low interest rates they were getting on their investments,” explains Marrion. “And they did not want to sell as much product until they had their new products out, with the lower minimum interest guarantees.”

Both design trends are temporary, predicts Marrion. “Ever since index annuities came out, the products with the longer surrender periods, higher commissions and bonus interest rates have always driven sales.”

Now that most of the carriers have their new products in place, with the lower minimum interest guarantees, those trends will resurface, he says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 12, 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.