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Fixed Annuity Frenzy

The mutual fund world may reside far from that of annuities, but fixed annuities have gained momentum as investors have sought out safe havens for their money. While single-digit fixed annuity yields seemed unappealing during the bull market, now, returns not preceded by a negative sign turn heads.(see chart, page 8).

"The reason for the increase certainly isn't high interest rates. I think it's the fact that, since equity prices are also falling, people are looking for a safe place to put their money, and they're looking for guarantees," said Eric Sondergeld, corporate vice president and director of the retirement research center at LIMRA International of Windsor, Conn.

"Even though fixed annuity rates are relatively low, it's a number you know in advance - and it's a positive," Sondergeld said.

Furthermore, while mutual funds eagerly wait to snap up money sitting on the sidelines in bank certificates of deposit, money market funds and savings accounts, some of those assets are now getting locked up in fixed annuities. Even though fixed annuities require more of a time commitment than the other instruments, the spread in yields and uncertainty have driven fixed annuity sales up consistently over the past two years.

Between 2000 and 2002, traditional fixed annuity sales have doubled from $30.2 billion to $60.6 billion, with an average annual growth of 42%, according to LIMRA. A large part of this growth has come from bank CD assets, said Jeremy Alexander, president of Beacon Research in Evanston, Ill.

Despite recent changes that have lowered the minimum rates offered by fixed annuities in many states (see Annuity Market News, April 2003), sales show no sign of slowing.

And carriers are hoping the newfound attention annuities are getting will last well beyond the end of the bear. Carriers, especially those that dropped fixed product to focus on more profitable variable annuities, aren't going to let fixed annuities fade from view, Alexander suggested. "I don't see them getting outfoxed like that again. I think there will be a lot more emphasis on this sector, rather than dropping it for the next best thing."

Distribution channels have changed, as well. While fixed annuities have traditionally been sold through captive agents, independent agents and banks, broker/dealers are starting to get into the game, Alexander said.

Sondergeld agreed: "I think it's also built up some momentum because the demand has shifted somewhat." Rather than rely on annuities being institutionally driven by distributors and product providers, public demand is shifting the focus more to the end user, and that is very positive for the annuity industry, Sondergeld said.

Market Value, Equity Index

Although a smaller portion of the fixed annuity market, market-value-adjusted annuities (MVA) and equity-index annuities (EIA) have made the most impressive gains between 2000 and 2002. With MVA annuities, the cash value changes according to the interest-rate environment, protecting investors from further declines in interest rates. Equity- index annuities pay investors a portion of an equity index, such as the S&P 500, but will return principal to investors if the index returns fall into negative territory.

MVA annuity sales grew from $9 billion in 2000 to $21.2 billion in 2002, a 135% increase over that period with average annual growth of 55%. At the same time, EIA sales went from $5.5 billion in 2000 to $11.8 billion in 2002, a 115% increase with average annual growth of 49%.

Data from the Advantage Group in St. Louis, shows even more dramatic EIA sales because it includes sales of a broker-sold EIA introduced by ING Americas of Atlanta, in 2002; according to their figures, EIA sales grew from $5.4 billion in 2000 to $12.7 billion in 2002, a 135% increase with average annual growth of 58%.

EIAs fall somewhere between fixed and variable annuities on the risk-reward scale, Alexander said. "There's some interest, but with these products, there's a somewhat slow adoption process for the market." While sales have increased dramatically during this market, they still constitute a relatively small portion of overall fixed annuity assets, which total around $100 billion. Furthermore, the recent buzz around the product may be relatively ephemeral. "I'm predicting that sales will actually drop in the first quarter of next year," said Jack Marrion, principal at Advantage Group.

Changed Attitude

However, the market for traditional fixed annuities may be built to last. The uncertainties of the equities market may be provoking persistent changes in investor - and broker - attitudes.

"The 90s taught us two things: that equities probably are a pretty good investment in the long run, and that there's risk inherent in this investment," Sondergeld said. "Perhaps what will now happen is a more balanced approach, that we won't see people be quite as dramatic with their allocation to equities that they were in the 90s that would suggest a more permanent place for fixed annuities."

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