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.