Broker-dealers remain a small part of the fixed annuity market, but they are a distribution channel that bears watching.

In the 2nd quarter of 2006, B-D fixed annuity sales accounted for just 8.2% of total fixed sales, according to a study of 50 companies representing an estimated 88% of the U.S. fixed annuity market. Results like this have been the trend for some time. Since 2003, B-Ds have never claimed a share greater than 9.5%.

However, B-D fixed sales have been climbing steadily since November 2005. The study, conducted by Beacon Research, Evanston, Ill., shows this channel produced $1.25 billion in fixed annuity sales in the 2nd quarter of 2006.

In fact, fixed annuity sales in this channel rose faster than they did in the total market. Specifically, B-D fixed annuity sales rose 18% from the prior quarter and 8% from the 2nd quarter of 2005. (By comparison, total fixed annuity sales rose 8% and dropped 14% in the same periods.)

In terms of sales by product type, market value adjusted annuities were among the top sellers in the B-D channel; they represented 40.6% of the 2nd quarter’s B-D market share. By comparison, from 2003 through the 2nd quarter of 2006, MVA share of the total fixed annuity sales tracked by the study ranged from 6.2% to 12.3% This is as expected, since MVA annuities have long been more popular in the B-D channel than in the annuity market as a whole. For instance, of the 89 B-D channel products tracked by the study, 4 of the top 10 were MVA annuities. (Only 1 of the top 10 products overall was an MVA.)

It may be that registered representatives are more comfortable with MVAs than are other fixed annuity salespeople because the interest rate risk in MVAs operates in a way akin to bonds.

Registered reps also understand that MVA credited rates are usually higher than those offered by book value annuities, because the annuity owner assumes some of the interest rate risk.

Fixed immediate annuities also had a larger market share in the B-D channel -13.5% – than they did in total sales (7.1%) in 2nd quarter of 2006. This is somewhat surprising, since there is said to be distaste for these products in the registered world. Reps sometimes call annuitization “annuicide,” because annuitization is perceived to result in a loss of flexibility for the investor and commissions for the rep.

Where fixed immediate annuity sales are concerned, in the B-D channel, these grew by 17.7% compared to the 2nd quarter of 2005. This may be a partial reflection of concerted efforts by carriers including Genworth, MetLife and New York Life to educate reps on immediate annuity benefits.

However, B-D channel fixed immediate sales were down 3.7% from the prior quarter. If this trend continues, it may be due to increasing competition from guaranteed minimum withdrawal benefits now prevalent in variable annuities.

What about fixed index annuities? These products accounted for a much smaller share of 2nd quarter B-D sales: 5.3%. By comparison, index products represented 37.7% of total sales. Further, index annuity sales dropped more dramatically from the 1st quarter of 2006 in the B-D channel (-67.2%) than they did in the broad market (-2.7%).

The index results are somewhat surprising. NASD Notice 05-50, issued in August 2005, recommends that B-Ds supervise the sales of index annuities. In view of that, the 2nd quarter figures would make sense if sales of these products shifted to B-Ds from other channels, or at least if the sales declined less in the B-D channel than was the case overall.

Perhaps the explanation is that registered reps generally are choosing to sell variable annuities rather than fixed index products. With the wide availability of various minimum guaranteed benefits, VAs can claim a similar value proposition (upside potential with protections against downside risk) to that of fixed index annuities. Also, dually licensed producers do not face the same confusion regarding whether and how to sell VAs as they do with fixed index annuities; VA sales programs are very well established among B-Ds, and they are a particularly important product line for independent B-Ds (IBDs).

Yet the index annuity picture changes when results for IBDs are considered separately. The IBD sales of index annuities increased 50.6% (or $14.2 million) quarter-on-quarter, and they increased 18.1% over the 2nd quarter of 2005. A sales shift does seem to be operating here.

It is estimated that some 60% of all independent producers also hold securities licenses. Independent producers have long sold the vast majority of index annuities (88.6% in 2nd quarter).

Therefore, Notice 05-50 is having its greatest impact on the distributors who serve these agents – the IBDs and the financial marketing organizations (FMOs) that do not distribute registered products. Consider: 2nd quarter index annuity sales through FMOs fell 7% from the previous quarter.

Some index annuity production moved to IBDs. But reported growth in the IBD channel was not enough in absolute terms to offset the $356.8 million drop in independent channel sales. (It should be noted that many IBDs are still putting fixed annuity programs in place. It also should be noted that sales growth in the IBD channel probably was higher than reported, because many have made selling arrangements with FMOs.)

In the future, B-Ds in general, and IBDs in particular, will be the battleground for the competition between fixed indexed annuities and VAs. Which will prove to be the most popular among investors who want upside potential with downside risk protection?

B-Ds also will be an important channel to watch regarding the role fixed annuities will play in retirement plans. Although data from the study is not extensive enough for definitive conclusions, it appears that registered reps are more likely to use fixed annuities for retirement purposes than are other producers.

Qualified sales at companies tracked by the study represented 82% of 2nd quarter fixed annuity production through B-Ds, compared to 38% of overall sales. If this is the case and the trend continues, B-Ds will play a much more important role in the fixed annuities market in the years to come.