In the fourth quarter 2005, however, sales were uneven. Index annuity sales for the quarter were $6.5 billion, down 6% from the third quarter 2005 and down 4% from the same year-earlier period. But IUL premium hit $66 million in the fourth quarter, nearly double IUL premiums in the same year-earlier period.

These results were compiled from the 34th index product sales survey conducted by Advantage Compendium, Ltd., St. Louis. They represent 99% of active index product sales.

Although the year set records, there were challenges in the autumn for index annuities. Sales dropped $418 million from the previous quarter, and if wasn’t for $80 million in sales from new entrants to the index annuity marketplace, the drop would have been greater.

The easy and wrong answer would be to attribute the entire drop in index annuity sales to the effects of the National Association of Securities Dealers Notice to Members 05-50, issued last August. The NASD notice did negatively impact sales, but other factors had equal or greater force.

The big story was competitive pressures from other sources, specifically from interest rates of bank certificates of deposit. The average short-term CD rate was 3.22% in the fourth quarter, up by over 0.25% from the third quarter and up almost 1.5% from the fourth quarter of 2004. These more attractive bank CD rates were the major factor for weak index annuity sales. (Significantly, the amount of money in bank savings instruments rose $169 billion last year, according to the Federal Reserve Board.)

Another contributor to the quarter’s decline in index annuity sales was the fact that one carrier yanked its top selling index annuities off the market at the end of the third quarter. The result was that this carrier’s fourth quarter sales were down $143 million, representing one-third of the industry’s $418 million fourth quarter drop.

However, the hoopla about how variable annuities with secondary guarantees are taking business away from index annuities is not bearing out. Our research on sources of funding for index annuities indicates that VAs with secondary guarantees have had no effect on index annuity sales.

All this is not to say the NASD’s moves did not impact sales. Carriers deriving most of their sales from producers who also held a securities registration generally took a hit as the broker-dealers for these reps tried to determine how to react to the NASD threat. The NASD’s attempt to regulate fixed insurance products did hurt sales, but the impact was not the deciding reason for the fourth quarter’s sales downturn.

Bank index annuity sales had a record year at nearly $1.2 billion. However, despite reports to the contrary, index annuity sales through banks only represented 4.33% of all index sales for 2005 and were only modestly up from the 3.96% share enjoyed in 2004. We do anticipate that this share of the market will continue to increase steadily, but slowly, as strong annuity bank carriers on the traditional fixed side continue to enter the indexed side of the business.

IUL was the real story this year, with its $186 million in industry premium increasing 50% over the previous year. (The fourth quarter 2005 sales alone were greater than annual sales from the 1990s, and this momentum isn’t about to stop.)

At the start of 2005, there were 12 carriers participating in IUL sales. At year-end 2005, there were 20 carriers in the market. There is evidence that six additional carriers are developing index life products, with yet another half dozen taking a serious look.

Based on last year’s growth, IUL carriers could outnumber variable life carriers by 2010.