Industry sales of fixed annuities totaled $18.2 billion in the fourth quarter of 2005, the lowest quarterly sales total since the second quarter of 2001.
The second half of 2005 proved to be extremely difficult for fixed annuities, with sales down 20% over the second half of 2004.
At year-end, fixed annuity sales were down, as well, to $78.9 billion–a 10% decline from 2004. This is despite 18% growth in equity index annuity sales, which now account for 40% of all fixed deferred annuity sales. Altogether, fixed sales represented 36% of industrywide annuity sales of $216.5 billion in 2005.
In contrast, variable annuity sales increased each consecutive quarter of 2005, finishing the year up by 4%.
The 2005 findings come from fixed annuity sales figures just out from LIMRA International, Windsor, Conn.
Despite the strong overall growth of EIAs, their sales fell slightly in the second half of 2005. The overwhelming majority of EIA sales (92%) are through independent agents. However, at $1.3 billion, bank EIA sales grew to 5% of EIA sales in 2005. Career agents sell the remaining 3% of EIAs.
The EIA market has grown more challenging over the past year. Competition among EIA manufacturers clearly increased as several insurers entered the market. Regulatory scrutiny also increased. In July 2005, for example, the Securities and Exchange Commission asked major EIA carriers for sales and marketing information; in early August, the National Association of Securities Dealers issued Notice to Members 05-50, advising that it believes EIAs essentially should be treated as registered investments. Negative media attention escalated, as well.
Despite the hurdles, the EIA market increased its fixed annuity market share.
Fixed-rate annuity sales continue to struggle in the difficult interest rate environment. Book value and market value adjusted annuities dropped 24% to $40.4 billion in 2005 from $53.5 billion in 2004. With the Federal Reserve repeatedly raising short-term rates, certificates of deposit began offering interest rates that increasingly were competitive with traditional fixed annuity rates. This competition was most evident in the bank channel, where fixed annuity sales declined sharply in 2005.
The largest percentage drop in fixed annuity sales occurred for MVA annuity products. As with book value deferred annuities, MVAs benefit to the extent that long-term interest rates exceed short-term interest rates (i.e., the yield curve is steep). The continuing increase in short-term rates has not led to a corresponding increase in long-term interest rates. In fact, the interest rate yield curve has flattened, and, at times, inverted. This has created an unfavorable interest rate environment for MVA sales.
Fixed annuity sales in 2005 include single-premium immediate annuities at $5.3 billion (flat with 2004) and structured settlements at $5.9 billion (down 2%).
The independent agent distribution channel continues to be the largest fixed annuity seller, with $35.4 billion in 2005 sales. Independent agent-sold business slowed in the second half, reflecting the EIA sales slowdown. In banks, where a significant amount of sales come from fixed rate annuities, fixed annuity sales dropped to $21.9 billion in 2005, down 26% from $29.7 billion in 2004. Independent agent and bank sales combined still make up 73% of all fixed annuity sales.
Sales of nonqualified annuities fell 16%, from $55.7 billion in 2004 to $46.6 billion in 2005. Qualified (including IRA) annuity sales showed a slight increase, from $26.2 billion in 2004 to $26.4 billion in 2005.
The payout annuity market share has remained largely unchanged since 1997, averaging 14% of all fixed annuity sales. Structured settlements sales had a slight 2% drop from $6 billion in 2004 to $5.9 billion in 2005. SPIA sales remain unchanged at $5.3 billion for 2005. The SPIA market has yet to demonstrate significant expansion, despite increased promotion of retirement income products.
Fixed annuity persistency declined over 2004 levels. The annualized year-to-date contract surrender rates and cash surrender rates were both 6.3% in 2005, representing an increase over 5.4% and 4.7%, respectively, in 2004.
Sales, along with growth of in-force assets, were sufficient to offset losses from surrenders in 2005: Fixed annuity assets reached $566 billion in 2005, up 6.2% since year-end 2004. Asset growth within qualified contracts continued to be slightly better than growth within nonqualified contracts, 7% vs. 6%, respectively.
For 2006, key issues for the fixed annuity industry will include: continued interest rate challenges for book-rate annuities and MVAs; competition from VAs with secondary guarantees; and possible resolution of whether all EIAs should be registered investments.