Compared with 4th quarter 2004 results, sales of fixed annuities in the 1st quarter of 2005 were down 15% for all types of fixed annuities. However, they were up 0.7% over the 1st quarter 2004.

The findings are based on data submitted to the Beacon Research Fixed Annuity Premium Study by 47 insurers, representing an estimated 60% of 1st quarter FA sales.

In the 1st quarter 2005 results, annuities with market value adjustments (MVAs) showed the biggest drop (20%) over the same year-earlier period. Both MVA and “book value” annuity sales also declined 22% from the 1st quarter 2004, but sales of all other product types increased, with indexed annuities showing the greatest gain.

Book value annuities, which are deferred fixed annuities that have no market value adjustment, continued to hold the largest share–47%–of fixed annuity sales in 1st quarter 2005. Indexed annuities drew a 38% share among the study participants, followed by market value-adjusted (MVA) products (9%) and immediate annuities (6%). (See Chart 1.)

Things were different in the captive agent channel. Book value products had a bigger share of 1st quarter FA sales in this channel (74%), and book value sales decreased by less compared to the previous quarter (15%) and actually increased slightly (1.6%) over 1st quarter 2004. Also, of the 90 products for which captive agent sales were reported in the 1st quarter, four of the five best sellers were book value annuities. (Only two of the top five products overall were book value.)

The captive agent findings are not surprising. Sales of fixed annuities in this channel have long been dominated by book value products, partly because most fixed annuities manufactured by their companies have been book value products, resulting in less competition from other product types. Captive agents also receive strong financial incentives to sell the products of their own companies.

Lower credited rates have less impact in this channel than they do in financial institutions, where the differential with certificates of deposit is the main factor driving sales. Captive agent carriers tend to be household name companies and highly rated in terms of financial strength, which may be particularly attractive in today’s investment climate.

What is new is that captive agent sales are increasingly diversified in terms of product type. The book value share of sales actually declined 540 basis points from 79.4% in 1st quarter 2004. Meanwhile, immediate, indexed and even MVA products have increased in share of captive agent sales. (See Chart 2.)

Immediate annuities are not a new product for captive agents. Of the 31 career agency companies in the study, 23 (almost three-quarters) offer an immediate annuity. Growth in sales of these products is in line with the market as a whole, fueled by increasing numbers of retirees who use the payouts to supplement income from pensions and Social Security.

In addition, captive agents sell a broader range of products than once was the case. For instance, 14 of the 31 now offer MVA products. Indexed annuities are now manufactured by 8 of the 31.

The more diversified product lines helped captive agents increase slightly their share of 1st quarter fixed annuity sales to 17% (from 16% in 1st quarter 2004). Captive agent sales rose 8.3% over the same period last year.

Without diversification in product type, it is likely that captive agent sales would have declined along with book value sales as a whole. However, independent producers continued to generate the highest percentage of sales in 1st quarter 2005 (45%), followed by banks (25.7%).

The one-year rate term remained the most popular book value interest guarantee period (IGP) in the 1st quarter 2005. It accounted for over 85% of sales (up slightly from an 83% share in 4th quarter 2004).

This was the case across all distribution channels: One-year IGPs drew 40% of reported 1st quarter MVA sales, up from a 26% share in 4th quarter 2004. The shift came mainly from the three- and 10-year IGPs. However, some channels shifted to longer interest guarantee periods. The captive agent channel reported a shift of 30.3% to the six-year IGP. Shifts to the five-year IGP were reported for the wirehouse (23.2%) and large/regional broker-dealer (11.1%) channels.

Jeremy Alexander is president and CEO of Beacon Research, Evanston, Ill. His e-mail address is jeremy@beaconresearch.net.

In the career agent channel, book value products had a bigger share of 1st quarter fixed annuity sales (74%) than did other channels