Individual fixed annuity sales in the United States increased 50% in 2008, reaching $109.4 billion (see Table 1).
These record-setting results for fixed annuities were more than enough to offset the 15% decline in variable annuity sales and enabled total individual annuity sales to increase modestly over 2007.
While the dramatic events starting in the latter part of 2008 weigh heavily on the economy, the market conditions affecting annuity sales actually began to unfold in the second half of 2007.
Beginning in the summer of 2007, short-term interest rates began dropping while long-term interest rates remained steady, creating an increasingly favorable yield curve for fixed annuities by the 4th quarter of 2007. In October 2007, the equity markets peaked and then began their long decline.
By mid-2008, the sales results confirmed what the improving yield curve and equities market environment foreshadowed: skyrocketing fixed annuity sales with dropping variable annuity sales.
This pattern last occurred on an annual basis in 2001. The following year, FA sales reached their zenith at $103.3 billion. VA sales also increased in 2002, despite a continuing drop in equity markets, as new guaranteed living benefit riders were introduced.
Overall election rates for GLBs rose during 2008, driven by growing election rates for guaranteed lifetime withdrawal benefit (GLWB) riders. GLWB election rates improved each quarter, reaching 58% in the 4th quarter, according to data from LIMRA’s quarterly Variable Annuity Guaranteed Living Benefit Election Tracking Survey. The guaranteed minimum income benefit (GMIB) rider was also popular, with election rates fluctuating between 32%-36%. Election rates for guaranteed minimum withdrawal benefits (GMWBs) and guaranteed minimum accumulation benefits (GMABs) were less than 10% throughout 2008.
The GLB riders are selling well among individuals in their early 60s, a demographic that coincides with the leading edge of baby boomers. For living benefits, the risk to carriers might be considered greater than the risk associated with death benefits. Only a very small percentage of annuity contract holders die in any given year, and mortality rates are likely to follow expected patterns, while contract holders with GMWBs or GLWBs can initiate withdrawals anytime. There is little data available to predict how these consumers will behave in volatile market conditions.
Fixed annuity sales are comprised of the following product types: deferred book value annuities, deferred market value adjusted (MVA) annuities, indexed annuities, fixed immediate annuities and structured settlements.
Fixed annuity sales increased for all product types in 2008. The competitive interest rates offered by FAs, in addition to the market volatility experienced in 2008, made FAs an attractive alternative for consumers looking for retirement products that can offer safety and guarantees.
Fixed-rate (book value and MVA) annuity assets grew mostly due to positive earnings. Indexed annuity assets grew mostly due to inflows exceeding outflows. VA inflows also exceeded outflows; however, VA assets dropped 24% due to a significant decline in investment earnings, down $388 billion, due to the decline in the equities market.
Overall, deferred annuity assets under management fell 16% during 2008, falling from $2 trillion to $1.7 trillion (see Table 2).
Total annuity surrender rates declined in 2008. The total annualized 2008 year-to-date cash value surrender rates were 7.1%, compared to 8.4% in 2007. FA surrender rates fell to 8.9% in 2008. The drop in surrender rates was particularly significant among fixed-rate annuities, which had surrender rates of 9.7% in 2008, down from 13.5% in 2007. VA surrender rates fell from 7.3% in 2007 to 6.4% in 2008.
At year-end, 60% of book value/MVA assets were in contracts that had a surrender charge, whereas 95% of indexed assets were in contracts that had a surrender charge. For VAs, 55% of assets were in VA contracts that had a surrender charge.
Robust growth in FA sales combined with lower-than-average declines in VA sales enabled the career channel to become the largest distribution channel for total annuity sales in 2008 (see Table 3).
Career agents increased FA sales by 71% while VA sales declined 10% in 2008. Banks had the second highest total annuity market share with FA sales improving 94% while VA sales fell 26%. The financial planner/independent broker-dealer channel remains the largest VA distribution channel, yet fell to third in overall annuity sales as VA sales in this channel fell 13%.
The independent agent channel remains the largest distribution channel for FA sales and was fourth in total annuity sales.
For deferred annuities, nonqualified annuities generated more sales premium than either IRAs or qualified employer plans. Of the $250.4 billion in deferred annuity sales in 2008, $107.6 billion went into nonqualified annuities while IRA sales totaled $105.3 billion and sales in qualified employer plans slipped to $37.5 billion.
For 2009, we expect to see continued success with FAs, particularly if the yield curve remains positive, which provides a favorable interest rate environment for fixed deferred book value and MVA sales.
Sales of IAs should continue to improve since proposed Rule 151A, approved by the Securities and Exchange Commission in December 2008, does not go into effect until January 2011.
Continued focus on the retirement income market will help to improve sales of single premium immediate annuities.
VA sales will be challenged to match 2008 sales levels. VA product manufacturers need to determine the right balance between which GLB rider features to offer and how much to charge for these additional guaranteed features.
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 [email protected] and [email protected]