Equity Indexed Annuities Driving Fixed Annuity Sales

By Dan Q. Beatrice

Led by a stunning increase in sales of equity indexed annuities, fixed annuity sales increased for the second consecutive quarter, reaching $25.4 billion in the 3rd quarter of 2004, according to LIMRA International.

Year-to-date 2004 sales of fixed annuities are down less than 1% from 2003 with $68.4 billion through the first three quarters (Figure 1). While traditional book value deferred annuities and stand-alone market value adjusted (MVA) annuities year-to-date sales remain in double-digit decline when compared to 2003, equity indexed annuity sales are up 63% (Figure 2). In the third quarter alone, equity indexed annuities accounted for 30% of all fixed annuity premium. And while 2004 shapes up as a flat year, LIMRA foresees strong growth for fixed annuities in 2005 and beyond.

Within 10 years, equity indexed annuities share of the fixed annuity market has gone from less than 0.5% in 1995 to 25% in 2004 (through the first 3 quarters; see Figure 3). The $17.3 billion in EIA sales so far during 2004 easily surpasses the $14.4 billion sold in all of 2003.

Fixed annuity product types also include the traditional book value deferred, stand-alone market value adjusted deferred, as well as payout products (fixed immediate annuities and structured settlements). Book value deferred products continue to hold over half the fixed annuity market; however, their share of the market has dropped to 55% in 2004.

Market value adjusted annuities peaked in 2002 with over 17% of fixed sales, before dropping to 11% in 2003 and just 7% in 2004. MVA products benefit from a steep yield curve in which long-term interest rates exceed short-term interest rates by a wider margin than a flat yield curve in which long-term and short-term rates are closer. However, long-term interest rates have been lower since mid-2002, and short-term rates now are rising, creating a less attractive environment for MVA products.

Fixed payout products have increased sales in 2004. Fixed immediate sales are up 3% year to date with $3.8 billion in premium, and structured settlements sales are up 9% with $4.9 billion in premium.

So, what will the fixed annuity market look like in the future? LIMRA expects that, after a relatively flat year for overall fixed sales in 2004, fixed annuity sales will rise sharply in 2005 and continue to rise in years 2006-2008 (see NU, Oct. 4). The makeup of the market will continue to fluctuate, reflecting the reactions to changing financial conditions. Rising interest rates, combined with unimpressive equity markets, could lead to improved sales of traditional fixed deferred products.

As a hybrid product, EIAs future sales success remains challenging to predict. In generating premium dollars, EIAs have increased every year since 1995. Their share of the fixed annuity market rose sharply from 1995 till 1998, but then actually declined slightly from 1998 till 2001, and now has risen each year since then.

Finally, sales of immediate annuities are likely to increase substantially in the coming years as more and more people enter retirement without sufficient guaranteed lifetime income sources.

Dan Q. Beatrice, ACS, AIAA, is analyst, retirement research, LIMRA International. He can be reached via e-mail at dbeatrice@limra.com.


Reproduced from National Underwriter Edition, December 30, 2004. Copyright 2004 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.