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March 23, 2008 at 04:00 PM
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).
