With markets recovering and interest rate spreads narrowing, the balance in individual annuity sales shifted in the second quarter from fixed annuities to variable.
Fixed annuity sales had outstripped VAs for the previous two quarters, but then declined sharply.
Combined with only a weak gain in VA sales, total individual annuity sales for the quarter fell 9% to $60.5 billion, compared to first quarter of 2009.
It was the first decline in overall annuity sales since the market collapse of 2008, and pulled total performance for the first half down to negative 3%.
For the second half of 2009, VA sales will likely remain fairly level, although a few companies may pursue the VA business aggressively to gain market share. Book value and market value adjusted fixed annuity sales will continue to struggle while indexed annuity sales will thrive under the present market situation.
Growing needs for retirement income will help fixed immediate sales, regardless of the low interest rate environment.
One issue that will hamper sales of both fixed annuities and VAs is the slowdown in external or 1035 exchanges, a significant source for annuity sales. There are several reasons for this.
Fixed annuity policyholders may not get a better deal in a declining interest rate environment and existing VA owners may hold on to their contracts since their guaranteed benefits are “in the money.” In addition, suitability concerns will dampen the number of exchanges.
As a result, if the industry is not able to attract new money from sources like rollovers, it will be difficult to generate real annuity sales growth.
In first half 2009, total individual annuity sales fell 3% to $126.8 billion as strong fixed annuity sales more than compensated for weak VA sales. Compared to first half 2008, year-to-date fixed annuity sales were up 39% to $64.2 billion while VA sales slipped to $62.6 billion, down 26%.
In second quarter 2009, rising equity markets helped push VA sales to $31.9 billion, up 4% compared to the prior quarter. VA sales continued to be fueled by living benefit guarantees–despite many companies raising fees, reducing benefits, or both on new riders. The rate at which any guaranteed living benefit was elected, when available at purchase, remained very strong at 89% during the quarter. Companies that made improvements to their GLB riders or did not scale them back gained significant market share in the quarter.