The challenging environment for fixed annuity manufacturers continued in the first half of 2006, as sales decreased, persistency worsened, and assets under management remained flat.

Fixed sales reached $37.5 billion, down 11% from the first half of 2005, according to LIMRA International’s latest report. Over 75% of those sales came from book value or equity indexed annuities (see Figure 1), which decreased 17% and 10%, respectively. Sales of qualified fixed annuities, including IRAs, dropped 6% while non-qualified fixed annuity sales fell 14%. Fixed annuities also include market value adjusted annuities, which had a more favorable first half, with sales up 13% to $2.7 billion.

Fixed immediate sales increased 12%, to $2.9 billion. This line now represents an 8% market share, up from 6% in the first half of 2005. The rise is most likely the result of the increased focus on retirement income planning at a number of companies.

Structured settlement sales dropped 10% to $2.7 billion compared to the same time period in 2005.

Overall annuity sales were up 10% the first half of 2006 to $119.3 billion. Variable annuities performed better than fixed annuities, increasing 22% over the same period last year.

A large driver of VA sales is the guaranteed living benefits rider that the newer VAs typically offer. These riders provide minimum guarantees plus the opportunity for gains. Based on LIMRA’s 1st Quarter Variable Annuity Guaranteed Living Benefit Election Tracking Survey, 46% of eligible VA sales elected the guaranteed minimum income benefit, while 43% of eligible sales elected the guaranteed minimum withdrawal benefit for life.

Fixed annuity persistency worsened in the second quarter of 2006, with annualized contract surrender rates rising to 10% from 8% in the first quarter. The year-to-date annualized contract surrender rates increased 48% over the comparable rate in 2005. On a cash value basis, year-to-date surrender rates were 9.2%. Both the contract and cash value surrender rates are higher for fixed annuities than for VAs.

Bank-sold fixed annuities had the highest overall contract and cash value surrender rates at 10.8% year-to-date for both. Among fixed annuities exiting the surrender charge period, annualized surrender rates were 19.3%, almost twice as much as the comparable rate last year. Qualified fixed annuities for the first half of 2006 had lower contract surrender rates than nonqualified (8% versus 9.9%).

Fixed deferred annuity assets were flat for the first half of 2006. Sales and growth of in-force assets almost exactly offset losses from surrenders in the first half of 2006. The growth in fixed qualified assets of 2.2% to $237 billion was erased by the 1.5% decrease in nonqualified assets ($324 billion).

For the first half of 2006, AIG was the top seller of individual fixed annuities. Sales from the top 20 carriers account for 77% of total fixed annuity market share (see company listings).

Banks’ fixed annuity market share has dropped to under 25% in 2006 (see Figure 2). Banks did see a quarter-over-quarter increase in the second quarter of 2006, but nonetheless experienced a 24% drop in fixed annuity sales when comparing the first half of 2006 to the first half of 2005. The fixed annuity products sold at banks are primarily book value, whose first half sales of $16.8 billion represent a 17% drop.

The independent agent distribution channel had a 9% drop in sales while easily remaining the largest seller of fixed annuities.

Independent agents are also the largest sellers of equity indexed annuities, sales of which were down 10% in the first half of 2006 to $12.4 billion. These products have had a lot of publicity from the media and regulators, and some companies indicate that new regulations have impacted the sales.

Fixed annuity sales accounted for 31% of all individual annuity sales in the first half of 2006. LIMRA expects fixed annuities’ market share to remain at 31% for the full year, on an estimated $71.2 billion in fixed annuity sales by year-end. Projections are for a flat year for fixed annuity sales in 2007.

It is important to note that, while fixed annuity sales are down, they remain at historically high levels. Before 2000, fixed annuity sales had never reached $50 billion in a single year. 2006 should be the sixth straight year that fixed annuity sales top the $70 billion mark. This sales record has been achieved despite historically low interest rates. Even after the current string of interest rate increases, rates remain low by historical standards.

Looking beyond 2007, more favorable interest rate conditions and demographics should lead to higher fixed annuity sales.