2006 Fixed Annuity Sales Drop 3.3%

Also in the 4th quarter, the sale of traditional FAs offering one-year interest guarantees rose to 69.4% of all sales, up from 66.2% in the previous quarter, according to the report.

That tracks with a general move that occurred toward shorter-rate terms, says Alexander, noting that MVA products have shown the same trend. “In the 4th quarter, interest rate guarantees of under 5 years accounted for 56.9% of MVA sales, up from 38.5% in the previous quarter.”

The results were also influenced by the rising equity markets, Alexander added. In the 4th quarter especially, the 20% returns in the equities market, compared to the 4%-5% returns on the risk-free side, made an impact, he says. Some people decided to put money into the market, including into variable annuities, instead of FAs, he explains.

This equation may change in 2007, he suggests, explaining that the recent stock market decline can shake confidence and change expectations. “Some consumers will rush to the fixed side again. Especially the closer people get to retirement, they start to realize they can’t afford big drops like that anymore.”

As for the overall decline in FA sales, Alexander says the same factors–declining interest rates and the strong bull market–were the chief drivers.

Another factor was the increasingly inverted yield curve, he explains. “When 1-year interest rates pay more than 10-year rates, the carriers have no pricing advantage in buying longer-term bonds–of 7-10 years–to support their FA rates. Longer-term bonds typically pay more, but not when there is an inverted yield curve.”

This has also been affecting the rates the companies can offer in their FAs, he continues, and that affects customer preferences. “Some customers bought more short-term CDs,” he explains. “Others moved money into the new short-term high yield savings accounts that have been coming out.” Additionally, they gravitated to FAs with shorter rate terms.

One surprising result is that sales of fixed immediate annuities grew in each quarter of 2006, to $6.1 billion at year-end. That is down 1.7% from 2005, Alexander allows. However, the quarterly growth throughout 2006 is significant all the same, due to an aberration in 2005: The 3rd quarter of 2005 was especially strong and the 4th quarter was down. That skewed the year-to-year comparisons.

The important thing about immediate annuities is that sales are rising, seemingly without regard to interest rate or stock market movements, Alexander says. This suggests that older baby boomers are using these products for to create retirement income for life, he says.