Index annuity sales dropped nearly 3% in the first quarter of 2006 compared to the previous quarter but only 2% when compared to the first quarter of 2005, according to the Advantage Index Product 1st Quarter 2006 Sales Report.

The total sales for the first quarter were just over $6.3 billion, according to the report, which is published by Advantage Compendium, St. Louis, Mo.

Meanwhile, index universal life sales at 20 companies performed strongly, with premiums reaching $72.8 million in the first quarter of 2006. That is nearly 40% of the $186 million in sales the industry reported for all of 2005, says Advantage Compendium.

In other news, index annuity complaints ramped up in 2005 compared to the previous year, says Advantage Compendium. This finding comes from the firm’s new report on annuity complaints closed in 2005 and 2004. The complaint data was drawn from the Consumer Information Source section of the National Association of Insurance Commissioners Website (www.naic.org).

“People have been saying that complaints involving index annuities were greater than those involving variable annuities, so we decided to find out if that was true,” says Jack Marrion, president of Advantage Compendium.

“We learned it was true for 2005. However, it was not the case in 2004.”

Regarding the first quarter sales fall-off, Marrion suggests the reason is twofold: “It’s a combination of the direct effect of bank certificates of deposit starting to offer decent interest rates that compete with index annuities, and the indirect effect of the National Association of Securities Dealers’ Notice 05-50 from August 2005,” which cautions broker-dealer members against selling fixed index annuities.

The quarter’s sales were off even though 59% of the first quarter sales were on products paying 9% to 11+% in commissions, notes Marrion. By comparison, a year ago, only 49% of sales went to products in the 9% to 11+% commission range, according to the report. (See table).

Many carriers promoted their higher-commissioned products in the quarter to keep producer attention on index sales even as bank CD rates were rising, he says. “But that apparently was not enough for the industry to get a quarterly sales increase.”

The second quarter of 2006 may have better results, Marrion predicts. This is because “many index annuities now have higher interest rates, higher caps on earnings and higher basic index participation rates than in the first quarter,” he says.

The 2006 results were based on sales of 51 index annuity providers, representing 96% of the market. Results of two providers were estimated.

Roughly 83% of the first quarter sales were in products with surrender periods of 10 years or more, Marrion notes. By comparison, in the third quarter of 2005, when sales approached $7 billion, only 74% of the sales were in the 10 years or more category.

The quarter’s top seller was Allianz Life, which brought in over $2.2 billion in total index annuity sales and had a 35.28% market share. Others in the top five, in descending order, were: ING, American Equity, AmerUs Annuity Group and Midland National.

The new complaint report compared closed complaints in 2004 and 2005 for all index annuity companies with those for the 25 largest sellers of variable annuities. The complaints ranged from fraud to delays in policyholder services complaint data.

In 2005, the report says, there were 104 closed customer complaints specifically reported on index annuities or one complaint for every $259 million in premium. This result was “worse” than in 2004, when there were 35 closed complaints reported, or one complaint for every $614 million, the report says.

By comparison, VAs drew 176 closed customer complaints in 2005, or one for every $729 million of VA premium, the report says. This was “better” than in 2004, when VAs had 181 closed customer complaints reported, or one complaint for every $676 million.

The VA complaints are higher than fixed index annuity complaints, the report notes. But VA sales are also much higher than index annuity sales, it adds.

When looking at complaints per dollar of premium ratio, index annuities had three complaints for every one VA complaint, the report says. “Still, the results aren’t bad, when you consider index annuities had only one complaint for every quarter billion of premium,” says Marrion.