Sales have fallen for 2 consecutive quarters in a row

Index annuity sales for the 1st quarter of 2005 drew over $6.4 billion in premiums, according to Advantage Compendium, Ltd., a St. Louis, Mo., index annuity tracking service. That’s down 5% from the nearly $6.8 billion total in the 4th quarter of 2004, says Jack Marrion, president of Advantage.

It is also the second quarter in a row of declining industry sales. In 4th quarter 2004, total index annuity sales were down 4% from the 3rd quarter.

However, the 1st quarter 2005 figure does represent a 53% increase over the same year-earlier period, says Marrion.

The 1st quarter figures come from 35 insurers that represent 100% of the industry’s active IA carriers, Advantage says.

Despite the decline, Advantage’s projections for year-end 2005 have index annuity sales exceeding 2004′s year-end number of nearly $23.4 billion–which was a record for the industry.

The rosy year-end 2005 projection reflects the fact that several new carriers are entering the market, Marrion says.

For instance, Protective Life made its index annuity market entry at the beginning of this year. In May 2005, 3 more carriers followed suit–West Coast Life (a new entry), Aviva Life (a new entry) and Great American (a re-entry).

“Also, at least 6 more companies will enter later in 2005,” Marrion says.

The new players will increase industrywide sales by attracting business from new channels, especially banks, he predicts.

The 1st quarter’s top carriers, by sales, are: Allianz Life, American Equity, Old Mutual (which has 2 companies selling its index annuities), AmerUs Group (which also has 2 companies selling its IAs), and ING. The top 5 companies have a combined 1Q market share of 67.15%, Advantage says.

Allianz Life took the largest market share, at 35.4%, on sales of nearly $2.3 billion for the quarter. This is down from the almost $2.5 billion Allianz pulled in during the 4th quarter of 2004, but the decline is “not surprising,” says Marrion, because the recent sales are following what amounted to a “fire sale” on Allianz index annuities in the 3rd quarter of 2004.

What is surprising, he says, is how well Allianz’s index annuity sales have held up after the fire sale.

Two other market leaders in the 1st quarter did show quarter-over-quarter gains, he allows, but neither one had total sales close to that of Allianz.

Why are industrywide index annuity sales down, following several record quarters?

Marrion believes rising interest rates are the key factor. A year ago, bank certificates of deposit were paying 1.5% in interest, he recalls, but today CD rates are ranging from 2%-5%, based on length of CD period. These higher rates make CDs “very competitive” with fixed annuities, he says, especially since “consumers are looking for a sure thing.”

By contrast, index annuities represent uncertainty to some buyers, he suggests. This uncertainty stems from the fact that buyers do not know whether or how much the index to which their policies are linked will rise. They also don’t know whether the credited interest paid by their policies will reach the policy maximums (caps), Marrion says, noting that many caps today range from 6% to 8%.

“Long term, the index annuity is still the better choice for many consumers,” Marrion contends, pointing to the policies’ upside potential and underlying guarantees.

However, he says, “to the buyer looking for a sure thing, the CD often seems more attractive right now.”

He points to the growth in consumer deposits as an indication of this. “The CD deposits have increased $60 billion in the last 6 months,” he says, citing Federal Reserve numbers, “and bank money market and savings account balances have risen $75 billion in the same period.”

The “sure thing” is the compelling story right now, he says.

Other 1st quarter findings: The “annual reset-averaging” method of computing credited index annuity interest dominated the 1st quarter, with nearly 55% of policies sold using this method. A year earlier, the AR method appeared in only 28% of sales. Also, surrender periods on contracts continued to shorten, with over 11% of policies sold having 7-year surrender periods; nearly 30% with 10-year periods; and, over 36% with 10-plus-year periods. A year earlier, the percentages were 5%, 42% and 41%, respectively. The average premium was $45,000.

Index annuities sales are down, but several new carriers are entering the market

The Numbers

IA INDUSTRY LEADERS

Company 1Q Premium

($millions)

1. Allianz Life $2,269.4

2. American Equity 620.3

3. Old Mutual 542.2

4. AmerUs Group 502.5

5. ING 370.0