Individual annuity sales reached a record $236.2 billion in 2006, a 9% increase over 2005.
These record sales are the result of highest-ever variable annuity sales in 2006, which climbed to $160.6 billion, up 17% from the prior year. Fixed annuity sales had a more challenging year, however, with sales dropping 5% to $75.6 billion.
VA sales benefited from improved market conditions along with continued enhancements to guaranteed living benefit riders, which provide policyholders a means of participating in market gains while protecting investments from downside losses. GLB riders have become essential to the long-term strategies of nearly all major retail VA companies.
In the second half of 2006, roughly $50 billion of the $57.8 billion in new contract VA premium occurred in contracts in which a GLB was available, according to estimates by LIMRA International. A GLB was elected 77% of the time when available.
The most popular type of GLB is the lifetime-based guaranteed minimum withdrawal benefit (GMWBL), according to LIMRA data. Last year, 39% of eligible VA sales elected this benefit.
Another popular benefit is the guaranteed minimum income benefit (GMIB) which was elected by 36% of eligible sales. The standard (non lifetime-based) GMWB and the guaranteed minimum accumulation benefit (GMAB) constituted a small portion of eligible sales.
Fixed annuity sales are split by the following product types for deferred products: book value deferred, market value adjusted (MVA), and indexed annuities, along with fixed immediate annuity products and structured settlements sales.
Indexed annuity sales fell 10% year over year, dropping to $24.5 billion. They now account for 38% of all fixed deferred annuity sales and 10% of all annuity sales (see Figure 1). Contributing factors in the sales decline included the insurance industry’s response to regulatory issues surrounding indexed annuities–such as lowering commissions and making other policy modifications–and also lingering negative publicity.
Fixed-rate annuity (book value and MVA products) sales continue to struggle in this difficult interest rate environment. Interest rates offered on bank certificates of deposit were competitive compared with those offered by traditional fixed-rate annuities. These products dropped 4% from $41.1 in 2005 to $39.4 billion in 2006.
Fixed payout annuity sales include single-premium immediate annuity sales of $5.9 billion (up 11% for 2006) and structured settlement sales of $5.8 billion (down 2% from 2005). During the year, some leading companies intensified their product development and marketing efforts for SPIAs.
Among distribution channels, career agents were the largest seller of total individual annuities followed closely by the financial planners/independent broker-dealers, independent agents, banks, and stockbrokers (see Table 1). VA sales within the financial planner/independent broker-dealer channel jumped 31% in 2006 while VA sales at banks increased 20%, both outpacing VA industry sales.
Fixed annuity sales are dominated by independent agent and bank distribution channels. Unlike variable products, fixed annuity products posted a decline in sales of 14% in banks.
In banks, fixed annuity sales (primarily book value products) continued to be adversely affected by the interest rate environment more so than in other distribution channels.
Independent agents comprise the largest share of indexed annuity premium, and are large sellers of immediate annuity products. The increase in immediate annuity sales helped mitigate the decrease in indexed annuity sales.
Qualified annuity sales–fueled by rollovers into IRAs–increased 13%, reaching $130 billion in 2006. Sales of nonqualified annuities totaled $100 billion in 2006, up 5% from a year ago.
Total annuity surrender rates continued to rise in 2006. The total annualized 2006 year-to-date cash value surrender rates were 8%, compared to 6.3% in 2005. Fixed annuity surrender rates approached 10% in 2006. The rise in surrender rates has been particularly significant among fixed bank-sold annuities, many of which are beginning to exit surrender penalty periods and/or are offering renewal rates that cannot compete with current rates for CDs.
Total annuity assets increased almost 11% in 2006, going from $1.8 trillion to $2 trillion. Sales, along with growth of in-force assets, were sufficient to offset any losses from surrenders in 2006. VA assets grew 15% to $1.4 trillion while fixed annuity assets were flat at $565 billion in 2006.
Key issues for the fixed annuity industry in 2007 include continued interest rate challenges for book-rate annuities and MVAs; competition from VAs with secondary guarantees; and resolution of issues surrounding indexed annuities.
In 2007, the VA industry will see continued innovation with GLBs as well as further efforts toward courting distribution partners by developing low-fee, simplified products.