Individual annuity sales in the U.S. reached $257 billion in 2007, according to LIMRA International’s year-end data.
This 8% increase over 2006 largely resulted from record-setting variable annuity sales, which grew 15% year-over-year to $184.2 billion. In contrast, fixed annuity sales decreased 7% to finish 2007 at $72.8 billion (see Table 1).
A volatile equities market trended upward throughout much of 2007, until the corrective environment in the 4th quarter. The appeal of VA guaranteed living benefit riders tends to increase during volatile market conditions, so sales benefited. An additional benefit of volatile market conditions, where GLBs are concerned, is that some benefit calculations let the GLB benefit base increase as the market increases, and remain the same (or even rise) when the market decreases. Step-up opportunities also become more valuable during such market environments.
In 2007, 91% of new deferred VA premium, $128.4 billion, went into contracts in which at least one GLB rider was available. For 77% ($98.8 billion) of that premium, a GLB rider was elected.
The guaranteed lifetime withdrawal benefit was the most popular type of GLB, according LIMRA’s quarterly Variable Annuity Guaranteed Living Benefit Election Tracking Survey. This benefit’s election rate increased quarterly, up to 48% of eligible VA sales by the 4th quarter. Another popular VA benefit was the guaranteed minimum income benefit; its election rates were relatively flat in 2007 and 33% in the 4th quarter.
Note: Not every VA offers every type of GLB. Therefore, the sum of election rates by GLB type will exceed the rate at which “any GLB” was elected.
As for fixed annuity performance, total fixed sales were split by the following product types: book value deferred, market value adjusted (MVA), index annuities, fixed immediate annuities and structured settlements sales.
Sales of fixed deferred annuities decreased for each fixed deferred product type in 2007.
Book value product sales were down 14%; MVA sales declined 9%; and index annuity sales were off 2%. Slight annual increases occurred for fixed immediate annuity sales and structured settlements, rising 5% and 3%, respectively.
The interest rate environment was unfavorable for fixed annuity sales well into the summer, before declining short-term interest rates created a more favorable yield curve–in which long-term interest rates exceed short-term interest rates. While fixed annuity sales were down 7% for the year, in the 4th quarter of 2007, these sales were actually up 6% compared to 4th quarter 2006. However, the favorable yield curve did not completely override the fact that (short-term) interest rates were down.
The challenging year for fixed annuities is probably better depicted by analyzing deferred annuity net flows.
Industry deferred annuity assets under management (AUM) dropped 7.4% for book value/MVA products to $402.1 billion, as outflows more than doubled the inflows during 2007. For VAs, AUM was up 8.6% by year-end to $1,497.1 billion, and AUM for index annuities rose 19.2% to $122.8 billion. Inflows exceeded outflows for VA and index annuities (see Table 2).
Total annuity surrender rates continued to rise in 2007. The total annualized 2007 year-to-date cash value surrender rates were 8.4%, compared to 8% in 2006. Fixed annuity surrender rates jumped to 11.9% in 2007. The rise in surrender rates has been particularly significant among book value and MVA annuities which had surrender rates of 13.5% in 2007. At year-end, 64% of book value/MVA assets were in contracts that had a surrender charge, whereas 97% of indexed assets were in contracts that had a surrender charge.
Strong VA sales growth in what is the largest distribution channel for VA sales enabled financial planner/independent broker-dealers to become the largest distribution channel for overall annuity sales (see Table 3). VA sales in this channel increased by 18% in 2007. Career agents had the second highest VA market share with VA sales up 11% followed closely by stockbrokers, up 23% in 2007.
The independent agent channel remains the largest distribution channel for fixed annuity sales despite experiencing an 8% decline in sales. Banks had the second highest fixed annuity market share with fixed annuity sales down 15% in 2007.
Uncertainty about how index annuity sales will be regulated and whether their sales process will become a de facto securities transaction, governed by Financial Industry Regulatory Authority rules, may have dampened sales of these predominantly independent agent-sold products.
The interest rate environment hurt bank fixed annuity sales.
Non-qualified annuities generated more sales premium during 2007 than either individual retirement accounts or qualified employer plans. Of the $244.2 billion in deferred annuity sales in 2007, $104.3 billion went into nonqualified annuities while IRA sales totaled $94.8 billion and sales in qualified employer plans hit $45.1 billion.
For 2008, changes to the interest rate environment will have the biggest impact on fixed deferred book value and MVA sales. Also, continued innovation in single premium immediate annuity products offering flexibility, liquidity and the ability to have payments increase to cover inflation could help to improve SPIA sales.
In addition, look for more emphasis on products providing guaranteed lifetime income as part of the retirement income planning process.
Resolution or lack thereof, of how index annuities should be regulated will impact the marketing and sales of these products.
Meanwhile, the VA industry will continue to see enhancements to guaranteed living benefit riders. Companies offering guaranteed lifetime income payments may offer some form of guaranteed growth to help cover cost-of-living increases and provide features that will allow the guaranteed payments to increase if they are used to pay for medical expenses.
Daniel Q. Beatrice is an analyst, and Joseph Montminy is an associate scientist, in the Retirement Research Center of LIMRA International, Windsor, Conn. Their respective e-mail addresses are firstname.lastname@example.org and email@example.com.