Reflecting the impact of strong equity indexed annuity sales, fixed annuity sales for the first half of 2005 totaled $41.7 billion. This is up 1% compared to the first half of 2004 when sales amounted to $41.2 billion. (See Chart 1 for a breakout by annuity type.)
Sales of fixed-rate deferred annuities, which include book value and market-value-adjustment products, dropped 17% to $22.2 billion while EIAs rose 49% to $13.9 billion during the first half of 2005.
EIA sales accounted for 33% of all fixed annuity sales through June 2005.
Along with deferred sales, total fixed annuity sales include single-premium immediate annuity sales of $2.6 billion and structured settlement sales of $3 billion during the first two quarters of 2005.
Fixed immediate annuity and structured settlement sales rose 8% and 3%, respectively, over the same period last year. Deferred, immediate and structured settlement fixed annuity sales represent 38% of the $108.7 billion in year-to-date total annuity sales.
Fixed-rate deferred annuities have seen sales drop consistently since their peak in 2002 (see Chart 2).
In 2002, fixed-rate annuities benefited from poor equity market performance, as stock prices entered their third straight year of decline. Sales also were boosted due to the low interest rate environment, in which other fixed-rate products, such as bank certificate of deposits, offered returns lower than the typical fixed annuity minimum guaranteed rate. The steeper yield curve in 2002 particularly favored products with MVA features.
In the present environment of rising interest rates and temperate equity market performance, buyers may be reluctant to lock in to fixed-rate investments.
Banks saw a 20% drop in fixed sales compared to 2nd quarter year-to-date 2004. Almost 90% of bank annuity sales are fixed-rate annuities.
With the Federal Reserve increasing short-term rates 10 times since June 30, 2004, interest rates offered on bank CDs have risen while fixed annuity rates have remained fairly level.
Recently, one-year CD rates have even surpassed fixed annuity rates–something that has not occurred in at least a decade. The impact of this recent development may already be taking place, as fixed deferred annuity sales slumped in the month of July, as measured by LIMRA’s Monthly Fixed Deferred Annuity Sales survey.
The independent agent distribution channel is the largest seller of fixed annuities with $18.2 billion in sales in the first half of 2005. Combined with bank sales, these two distribution channels make up 73% of all fixed annuity sales (see Chart 3).
Approximately two-thirds of purchases through independent agents are for EIAs. Independent agents saw a 24% increase in sales compared to 2004 due largely to the continued success in selling EIAs. We expect the increased demand for products like EIAs to continue as investors look to benefit from any increases in the equity markets while protecting their principal and earning a minimum guaranteed return.
In contrast to sales, fixed annuity persistency worsened in the 2nd quarter, with annualized contract surrender rates rising to 6.4% from 5.7% in the 1st quarter. The year-to-date annualized contract surrender rate increased 15% over the comparable rate in 2004. On a cash value basis, year-to-date surrender rates were 5.3%. Among fixed annuities that exited the surrender charge period, annualized surrender rates were 10%.
Sales, along with the growth of in-force assets, were sufficient to offset any losses from surrenders in 2005: fixed deferred annuity assets reached $549 billion by mid-year, up 3% since the end of 2004. The asset growth within qualified contracts was slightly better than the growth within nonqualified contracts, 3.7% vs. 2.2%, respectively.
Market share for payout products has remained largely unchanged since 1997, averaging 14% of all fixed sales. While structured settlements have increased steadily, the SPIA market has yet to experience significant expansion.
The forecast for fixed annuities looks bright, according to “The 2004 Individual Annuity Market,” a LIMRA report. After a flat year in 2005, fixed annuities should benefit from a higher interest rate environment. Fixed annuity sales are forecasted to jump 27% in 2006, and an additional 18% in 2007. Six months into 2005, the current year forecast is on target as the $41.7 billion in fixed annuity sales is just over half of the forecasted $82.9 billion.
Given the small market share of payout products, most of this projected fixed annuity sales growth has to come from either fixed-rate deferred annuities, EIAs or both. In the near term, EIA growth should continue to make up for falling fixed-rate sales.
But one area of concern is the regulatory scrutiny that EIAs have received lately. The National Association of Securities Dealers recently issued a notice to its members addressing the responsibility that companies have to supervise the sales of EIAs that are not registered. Last month, the SEC requested information from various insurance companies on their EIAs. This increased activity could negatively impact EIA sales.
Nonetheless, demographics and market conditions should allow for fixed annuity sales to rebound and grow in the future.
Dan Beatrice and Joseph Montminy conduct annuity research in LIMRA International’s Retirement Research Center, Windsor, Conn. Their respective e-mail addresses are: firstname.lastname@example.org and email@example.com.
EIA sales accounted for 33% of all fixed annuity sales through June 2005