Significant changes swept through individual annuity sales in 2009.

Variable annuity sales declined considerably early in the year before slowly recovering, while fixed annuity sales enjoyed record growth early in the year but fell sharply through the rest of 2009.

For the first time, both VA and FA sales dropped in the same year.

In 2009, total individual annuity sales fell 11% to $234.9 billion (see Table 1). VA sales of $127 billion were down 18% compared to 2008. The last time annual VA sales were recorded at this level was in 2003, at the end of the last financial crisis. It is the first time annual VA sales declined for two consecutive years.

FA sales were down slightly from the prior year at $107.9 billion. However, these annual changes do not tell the whole story.

VA sales in first quarter 2009 were at a six-year low and then slowly recovered throughout the rest of the year. By fourth quarter 2009, VA sales had inched up to $32.6 billion, 3% higher than third quarter. This slow improvement in VA sales was in contrast to the S&P 500 index, which rose 23% in 2009.

Typically, VA sales move in tandem with the equities market, but in 2009 that did not happen. Driving this change was the decline in 1035 exchanges that had helped fuel new sales in recent years.

Many VA companies that offered guaranteed living benefit (GLB) riders adjusted their annuity product lines and pricing of GLB riders in the first three quarters of 2009. The de-risking adjustments to VA products and riders appear to be complete, and the fact that VA sales were up slightly in fourth quarter could bode well for VAs in 2010 as investors continue to show interest in buying GLB riders in their VA contracts.

The GLB election rate, when available at purchase, remained strong at 84%, during fourth quarter, though slightly less than the 89% experienced in the prior quarter.

By comparison, FA sales hit a record high of $35.7 billion in first quarter 2009, the sales were spurred by offerings of attractive interest rates and safety from the plunging market. But FA sales fell sharply throughout the rest of the year.

By fourth quarter, FA sales had dropped to $20.7 billion, as interest rates declined and corresponding spreads thinned to very low levels. Fourth quarter FA sales were down 10% compared to third quarter and 42% below first quarter 2009.

Traditional book value and market value adjusted (MVA) annuity sales were hit the hardest by the decline in interest rate spreads.

Fourth quarter book value and MVA sales were down 10% and 36%, respectively, from third quarter. Interestingly, book value sales finished 2009 at $51.7 billion, up 2% from last year as a result of record first quarter sales. MVA sales in 2009 totaled $14.1 billion, 20% lower than 2008 levels.

Indexed annuity (IA) sales had a record year in 2009, increasing 9% over 2008, to $29.4 billion. These sales grew as buyers took advantage of rising, yet uncertain, market conditions. However, fourth quarter IA sales pulled back 5% from third quarter, totaling $6.9 billion.

Fixed immediate annuity sales of $7.1 billion were 10% below 2008. This drop was the result of a very low interest rate environment and concerns over the long-term stability of some financial services companies.

For 2010, VA sales will continue to improve as the equity markets rise, but not at the same pace. One issue that will continue to impede VA sales is the decline in 1035 exchanges. This trend can be seen by looking at the VA surrender rates that fell in 2009 as a substantial portion of VAs with guaranteed benefits (death or living) were “in the money.” LIMRA’s quarterly U.S. Annuity Persistency survey revealed that the VA annualized cash value surrender rates declined from 6.4% in 2008 to 5.2% in 2009.

Sales of traditional fixed deferred annuity products will remain depressed as long as the interest rate environment remains at current levels.

Indexed annuity products will continue to be strong.

Fixed immediate annuity sales will also experience gains in 2010 due to: 1) the increased focus by distribution firms on retirement income planning and products that generate income; 2) increased media coverage from the Obama administration’s focus on guaranteed lifetime income products; 3) improved confidence in the long term stability of financial services companies; and 4) the expected improvement in interest rates.

Joseph Montminy is assistant vice president and director of LIMRA Annuity Research and Jafor Iqbal is associate managing director of LIMRA Retirement Research. Both are based in Windsor, Conn. Their respective e-mail addresses are: jmontminy@limra.com and jiqbal@limra.com.