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June 18, 2007 10:25 pm

Baby boomer factor boosts annuity sales

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Individual annuity sales in the first quarter of this year were $57.9bn, a 2 per cent increase over the first quarter of 2006, as companies continued to slash their defined benefits plans, and baby boomers sought retirement products with guaranteed payments, according to a new study.

Annuities – insurance contracts that provide income in return for an upfront, single premium or periodic payments – are typically purchased by investors saving for retirement. With a deferred annuity, investors may choose the point at which they convert the accumulated principal and earnings – or losses – in their contract to a stream of income.

Sales of annuities have grown steadily over the past two decades, with a slight decline during the bear market of 2000-02.

The study, by Limra International, a research organisation that works for global insurers and financial service companies, found that sales of variable annuities
– which are linked to the stock market – continued to grow with first-quarter sales of $42.1bn, up 8 per cent compared with the same quarter in 2006. This is just shy of the single-quarter record of $42.5bn set in the second quarter of 2006.

“A turbulent market is good for variable annuity sales,” says Dan Beatrice, an analyst at Limra Retirement Research. “The guaranteed living benefit riders [which ensure the protection of the principal even when the market’s
performance is less than stellar] help alleviate the risk factor of the market. A turbulent market that’s going up is the best of all worlds for variables.”

However, sales of fixed annuities, which are tied to the bond market, were down 12 per cent to $15.8bn as fixed-annuity sales struggled in this difficult interest rate environment. Fixed annuities include fixed-deferred annuities – fixed-rate and indexed annuities – immediate annuities and structured settlements.

“Very, very recently we’ve seen evidence that the long-term rates might be heading up. This is positive for fixed annuities,” Mr Beatrice said, adding that there could be a turnround in sales in the second half of the year.

Limra, which used to stand for Life Insurance and Market Research Association, but now is a brand name, also reported that total deferred annuity assets grew 1.2 per cent during the first quarter of 2007 – reaching almost $2,000bn – the result of a strong stock market.

The study found that indexed annuities – which are designed to mirror the performance of a well-known index, such as the S&P 500 – had the largest percentage increase, rising 5.9 per cent to $109.1bn. Variable annuities grew 2 per cent to $1,400bn, while fixed-rate annuity assets fell 2.3 per cent, ending the quarter with $450.5bn. “In the first quarter, the story was the strong equity markets – investment earnings more than accounted for the asset growth,” Mr Beatrice says.

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