Second quarter total annuity sales increased for the first time since the fourth quarter of 2008, growing 11% over the first quarter of 2010 to $57.0 billion, according to LIMRA’s quarterly U.S. Individual Annuities sales survey. Annuity sales show signs of recovering as all major components of annuity sales improved when compared to the first quarter (Figure 1).
Variable annuity (VA) sales jumped more than $3 billion in the second quarter of 2010 to $35.5 billion. The 10% increase in second quarter sales was the first significant increase in quarterly VA sales since the second quarter of 2007. From the first quarter of 2009 to the first quarter of 2010, VA sales were stuck in a range of $31 – $33 billion. Second quarter fixed annuity sales improved 13% to $21.5 billion from the first quarter due to strong indexed and fixed immediate annuity sales.
However, the recovery is still in the early stages. Total individual annuity sales for the first half of 2010 were $108.4 billion, 16% below the first half of 2009. Year-to-date, VA sales were up 8% to $67.9 billion; while fixed annuity sales slipped to $40.5 billion, down 39% compared to the same period in 2009. It is important to remember that VA sales hit a six-year low and fixed annuity sales were at record-high levels in the first quarter of 2009. The direction of both fixed and VA sales have changed over the last 18 months along with industry-wide adjustments related to risk, capital requirements and pricing.
We see increased confidence in the insurance industry and sales representatives becoming more comfortable with changes to VA products and riders. This confidence was evident from the broad VA sales growth in which two-thirds of VA companies increased sales over first quarter.
In addition, VA buyers continue to purchase VAs with guaranteed living benefit (GLB) riders. VAs with GLBs accounted for three-fourths of all new deferred VA sales. The GLB election rate, when available at purchase, remained strong at 87% during the first half of 2010, according to LIMRA quarterly Variable Annuity Guaranteed Living Benefit Election Tracking survey. Many VA buyers want the opportunity for growth in their portfolios and the security of guaranteed lifetime income from the GLB rider if needed.
For four consecutive quarters, fixed annuity sales fell sharply from the record-high levels set in the first quarter of 2009 before finally registering an increase in the second quarter of this year. Book value and market-value-adjusted (MVA) annuity sales grew nine percent to $9.7 billion in the second quarter after appearing to have hit a bottom in the first quarter. These sales faltered over the last year due to declining interest rate spreads.
Indexed and fixed immediate annuity sales both matched record sales in the second quarter. Indexed annuity sales of $8.2 billion, improved 17% over the first quarter and matched the record level from the second quarter of 2009. Volatility in the equity markets and low interest rates continue to keep indexed annuity products attractive. Fixed immediate annuity sales of $2.1 billion improved 24% from the first quarter of 2010 and matched record sales set in the third and fourth quarter of 2008.
Career agents and independent broker-dealers were the two top distribution channels with year-to-date total annuity sales of $22.4 billion and $22.3 billion, respectively, with each channel accounting for 21% of total annuity sales. Independent broker-dealers remained the top VA sales channel with $19.8 billion, representing 29% of VA market share. Independent agents were the top fixed annuity distribution channel while 84% of indexed annuity sales were through independent agents. Strong indexed annuity sales, coupled with declining book value/MVA sales, have enabled the independent agent channel to increase its market share over last year, accounting for 40% of fixed annuity sales in the first half of 2010.
IRA annuity sales remained the top source for individual annuity industry sales by market type, contributing $25.2 billion in the second quarter (Figure 2). IRA annuity sales accounted for almost half of all deferred annuity sales in the second quarter of 2010. Non-qualified annuity sales grew 11 % to $19.9 billion in the second quarter while annuity sales through employer plans slipped 6% to $8.2 billion.
For the second half of 2010, we expect VA sales continue to increase at a moderate pace. VA GLBs will continue to attract individuals near or in retirement. Concern about higher taxes should offer a boost in non-qualified annuity sales by making tax deferral benefits more attractive, particularly among affluent clients, since it appears that some of the Bush-era tax cuts on marginal income and capital gains tax rates will revert to pre-2003 levels next year.
Book value and MVA fixed annuity sales will likely remain around current levels due to low interest rates and corresponding tight interest rate spreads. Indexed annuity sales will continue to grow under the present market conditions coupled with resolution of Rule 151A which clarified that indexed annuity products do not need to be registered with the SEC. Growing needs for retirement income, as well as an increased focus by the Obama Administration and distribution firms on the need for guaranteed lifetime income, will help fixed immediate sales grow regardless of the low interest rate environment.
Joe Montminy is assistant vice president and director of annuity research for LIMRA. Jafor Iqbal is associate managing director of retirement research for LIMRA.