Individual annuity sales reached $131.9 billion in the first half of 2008, a 7% increase over the first half of 2007. (See Table 1.)
These sales are the result of strong fixed annuity sales, which grew 39% year-over-year to $47.6 billion. Variable annuity sales in the same period slipped 6% to $84.3 billion compared to the first half of 2007.
These and other findings from LIMRA International’s first half 2008 annuity sales data reveal a market in transition.
For several years prior to 2008, the annuity sales trend was the reverse: VA sales increased while fixed annuity sales decreased. (See Figure 1.) The VA sales increases were driven by volatile yet rising equity markets. More people nearing retirement were concerned about protecting their assets, and guaranteed living benefits (GLB) within VAs provided guarantees to address consumer anxiety.
Meanwhile, sales of traditional fixed annuities were hampered by historically low interest rates along with a flat or, at times, inverted yield curve.
However, late in 2007, the equity markets began to decline while the yield curve returned to a more normal positive shape as short term interest rates fell. The impact on the annuity market was apparent in the reversal of VA and FA growth rates in the first half of 2008.
This apparent flight to FAs has occurred before. In 2002, FA sales peaked at $103.3 billion as equity markets endured a third consecutive year of decline. Now, the first half growth rate for FA sales in 2008, if sustained through the second half, would result in 2008 FA sales again surpassing the $100 billion mark.
As for variable annuities, despite their small decline in sales, these products still represent the majority of annuity sales and the product’s GLB riders are more popular than ever. In the first half, for instance, 81% of new VA premium was in contracts in which a GLB was elected, if available.
The largest component of fixed annuity sales, book value deferred annuities, saw an impressive 78% increase in sales to $22.4 billion.
Meanwhile, market value adjusted (MVA) annuity sales had the highest percentage increase, 85%, as sales hit $6.1 billion. These products benefited from the favorable interest rate environment in the first half.
As for indexed annuity (IA) sales, at $12.5 billion, these represented an increase of 2% for the first half of 2008. Sales of these products could dramatically change if the proposed SEC Rule 151A is adopted since this rule would require all IAs to become registered products. However, the proposed rule would not become effective until one year after it is adopted.
Sales of another FA type–fixed immediate annuities–increased 23% in the first half, to $3.7 billion.
The structured settlement product sales were down 6%, to $2.9 billion, however.
By distribution channel, banks became the largest channel for annuity sales, attracting $25.8 billion in the first half of 2008, despite being the fourth largest distribution channel for VA sales and the second largest channel for FA sales. The last full year in which banks were the largest distribution channel for annuities was 2004.
In 2008, banks took the top spot by virtue of an enormous increase in FA market share while enduring only a slight drop in VA market share.
For VAs, the largest distribution channel in the first half was the financial planner/independent broker-dealer channel. Here, sales of $23.1 billion constituted a 4% decrease. Career agents followed with $18.6 billion, an 11% drop.
For FAs, the top distribution channel in the first half remained independent agents. This channel increased its FA sales by 14% to reach $17.1 billion. Banks, which as noted earlier came in second in FA sales in the first half, produced $14.7 billion for the period–more than double what they sold in the first half of 2007.
What about surrender rates? Total annuity surrender rates fell in the first half of 2008. The year-to-date total annualized cash value surrender rates declined to 7%, compared to 8.5% in the first half of 2007. Annualized cash value surrender rates fell for both VA and FAs, as well as across distribution channels when comparing first half 2008 to first half 2007. Surrender rates were 8.6% for FAs and 6.4% for VAs. Volatile market conditions, combined with sharp decreases in interest rates, may have contributed to this improved persistency.
Total deferred annuity assets decreased by 4% during the first half of 2008, going from $2.02 trillion to $1.95 trillion. (See Table 2.) While book value/MVA and IA assets in force increased, negative investment earnings caused in force assets to drop 6% for VAs.
On an upbeat note, inflows exceeded outflows across deferred annuity product types in the second quarter of 2008.