By Eric Sondergeld and Daniel Q. Beatrice
When annuity sales declined in 2001, it was only the second time since 1985 that annual sales dropped from the preceding year.
In rebounding from the 2001 decline, the industry established a new record with $223.1 billion in total annuity premium volume in 2002, a 20% increase over the $185.3 billion total for 2001. These figures include sales for both fixed annuities and variable annuities.
The following is an assessment of annuity market positions as the industry moves into 2003.
The driving force behind the 2002 increase was fixed annuities. Premiums for stand-alone fixed annuities increased by 40% in 2002, reaching $103.8 billion–a third consecutive record sales year (see Figure 1). Though not a record, VA sales finished up 7% to end the year with $119.3 billion in sales, bolstered by a 40% increase in deposits to VA fixed accounts.
The vast majority of fixed annuity sales went into deferred products (see Figure 2). In 2002, deferred fixed annuities accounted for $93.6 billion, or 90%, of total fixed sales.
Among the different types of deferred fixed annuities, market value adjusted annuities had the largest percent increase, some 77%, in reaching $21.2 billion. The MVA feature allows the insurer to credit a slightly higher interest rate. In exchange, the customer bears some of the interest rate risk.
Equity indexed annuities increased 74% with $11.8 billion in sales during 2002. This reflects the appeal of having at least a minimum fixed return while maintaining the potential long term upside in the equity market.
Book value deferred annuities, with $60.6 billion in premium, actually had the smallest percentage increase of 32%.
Immediate annuities and structured settlements made up the remaining $10.2 billion in 2002 fixed annuity sales. Compared to 2001, immediate annuity sales rose 39% to $5 billion while structured settlement sales fell 13% to $5.2 billion.
VA producers faced the challenge of marketing their products during a third straight bear market year. By utilizing fixed account options within VA products, including dollar cost averaging strategies, and by emphasizing the guarantees these annuities provide, the VA industry was able to increase sales by 7%.
New premium placed directly into VA separate accounts actually declined 7%, but this drop was more than offset by the 40% increase in VA fixed account sales.
An inverse relationship between equity markets and fixed annuity sales, as opposed to fixed interest rates, may be the result. If that were to be the case, then an upswing in the equity markets could sharply reduce fixed annuity sales as customers pursue the higher returns in the newly rising equity markets.
