Annuity Sales Suffering

Sales of annuities, which have been hard hit by the 19-month-long slide in stock prices, may not recover even after the equity markets stabilize, a new study suggests.

To attract investors, the annuity industry may have to focus on new product twists and fee structures, the study says.

The report, released this week by Boston-based financial research firm Cerulli Associates, said increased competition in the annuity business has led to a nearly saturated market, with most transactions now driven by exchanges of one annuity for another rather than sales to new customers.

Annuities are retirement savings products that combine an insurance contract with an investment feature in which any gains or income generated can grow tax-deferred. The most popular type, known as a variable annuity, allows investors to put money into stocks, bonds or money market securities, often via mutual funds that target those asset classes.

Some financial advisors and securities regulators have been critical of annuities, saying the products often come with high fees and heavy withdrawal penalties. Nonetheless, investors loaded up on variable annuities as the stock market boomed in the late 1990s.

But the sum of money contributed to variable annuities in the first six months of 2001 fell 21.2% from a year earlier to $57.7 billion, according to Limra International, an insurance industry researcher.

Also, sales of annuities increasingly have been exchanges of one contract for another, as insurers battle one another for customers. So-called net sales--sales of annuities to new customers--declined to 21% of total sales in 2000, down from 31% in 1999, said Cerulli spokeswoman Cynthia Saccocia.

Insurance industry officials have pinned their hopes for recovery on a better stock market, but the Cerulli study contends that annuities have “nearly reached [their] full market potential with the current set of product offerings and distribution outlets.”

If insurers don’t develop new features for annuities and new ways to offer them to investors, the industry faces “a hasty decline of dwindling profits and escalating costs,” the report warned.

Cerulli said the number of companies offering annuities has grown from 25 in 1986 to 45 today, while the number of individual annuity products has exploded from 45 to 450.

Cerulli said the insurance industry could increase its market by developing more annuities that fee-based financial advisors can offer their clients. Instead of offering advisors large upfront commissions--the way most annuities currently are sold--insurers may need to lower fees and provide a wider array of choices.

Financial advisors “have begun shifting their business from a transaction-oriented to a fee-based structure,” the report said. “Insurers will be forced to provide a broad range of products--priced accordingly--to support the changing needs in advisory services.”

The industry also could boost sales by focusing on consumers’ growing interest in “immediate” annuities, the report said. Immediate annuities promise a lifetime stream of income in exchange for a lump sum of money upfront. The payments begin immediately.

By contrast, most annuities sold today are deferred annuities, in which money invested isn’t withdrawn until years later.