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Retirement Planning > Retirement Investing > Annuity Investing

Individual U.S. Annuity Sales Hit $124 Billion In 1st Half Of 2007

By Joseph Montminy

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LIMRA estimates that individual annuity sales reached $124.4 billion in the first half of 2007, a 3% increase over the first half of 2006 (see Table 1).

These record sales are the result of strong variable annuity sales, which grew 10% year-over-year to $90.6 billion. Fixed annuity sales in the first half of 2007 continued to struggle, with sales dropping 12% to $33.8 billion compared to the first half of 2006.

In other annuity market developments, total annuity surrender rates rose during the first half of 2007, while total annuity assets gained ground during the period.

Volatility in the equity markets most likely contributed to the growth in VA sales that offer guaranteed living benefits (GLB) riders. Consumers purchasing these GLB riders are able to participate in any market gains while protecting their investment from possible downside losses.

Total fixed annuity sales of $15.8 billion in the first quarter of 2007 hit their lowest level since the first quarter of 2001. Although FA sales were down year-over-year, total FA sales increased 14% from the first quarter to the second quarter of 2007.

Within the FA category, sales of fixed-rate (i.e., book value and market value adjusted products) are down 21% year-to-date as they struggled to compete in a difficult interest rate environment.

Fixed index annuity sales fell 8% year over year, dropping to $12 billion. This decline reflects uncertainty surrounding how FIA products will be regulated and marketed plus the negative publicity they have received. In the first half of 2007, the Attorney General in Minnesota filed suits against two major insurance carriers for unsuitable sales of annuities to senior citizens in that state, with many of the products involved being FIAs.

Single-premium immediate annuity SPIA sales reached $3.2 billion in the first half of 2007, a 10% increase. Companies active in the retirement income market have increased their marketing efforts for payout annuities and have begun to offer innovative products to attract baby boomers interested in converting some of their savings into income.

Deferred VAs gained market share over the last 5 years, rising from 53% of all deferred annuity sales in the third quarter of 2002 to 77% in the second quarter of 2007 (see Figure 1). FIA sales also gained market share, while FAs have dropped from 41% of the deferred annuity market to only 13%.

Total annuity surrender rates continued to rise in the first half of 2007. The year-to-date total annualized cash value surrender rates rose to 8.5%, compared to 7.8% in the first half of 2006. Surrender rates were higher for FAs at 11.5% than for VAs at 7.5%.

Total annuity assets increased almost 5% during the first half of 2007, from $1.9 trillion to $2.0 trillion. Strong sales, positive investment growth, and relatively low surrender rates led to a 7.2% gain in VA assets. But significant losses from surrenders pushed FA assets down by 4.6% during the first 6 months of 2007, from $434 billion to $414 billion.

Looking ahead, FAs may continue to face interest rate challenges during the 2nd half of 2007 as well as competition from VAs with GLBs. FA sales should improve as baby boomers retire and shift their focus from accumulation to more income-based products to maximize lifetime retirement income. FAs with GLBs were introduced in 2007. GLBs have been and still are key drivers for VA sales, so it is possible that they could help drive FA sales, too.

The VA industry will grow as consumers continue to purchase VAs with GLBs, which provide upside potential and downside protection on their investment. Consumers looking for retirement income can also purchase guaranteed lifetime withdrawal benefit riders that provide regular retirement income payments while retaining control of these assets.

Product innovations on VA GLB riders will continue. Recent innovations have included the ability to store income payments which can be taken out at a later point in time, having the benefit base increase if the consumer delays taking withdrawals, more frequent step-ups to the benefit base, and annual inflation protection to lifetime withdrawals.

Joseph Montminy is associate research director-retirement research, LIMRA International, Windsor, Conn. His e-mail address is [email protected].

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