You might expect fixed annuity sales to have an inverse relationship with the S&P 500.
That is often the case, but usually fixed sales are tied more directly to interest rates. Lower rates, such as those that prevailed in 2003, generally depress sales of fixed annuities.
The effect is not always so simple, however. This article looks at fixed annuity sales specifics, with an eye to what lies ahead.
Fixed sales rose from 2001 through July 2002, even as rates declined. And, in 2003, the low interest rate environment tended to favor certain product types and rate terms over others. The reasons for this apparently related both to market demand and shifts in products offered by carriers.
It is not just the interest rate environment that affects fixed annuity sales. At least as important is the extent to which fixed annuity credited rates are higher than yields on other interest-bearing investment alternatives.
To illustrate, look at Chart 1. This shows a favorable interest rate spread for fixed annuities over 5-year Treasurys, beginning as early as July 2000. This spread set the stage for the massive surge in fixed sales that began in 2001. Sales rose despite declining rates, partly because the spread was favorable. Investors who were in a conservative mood found fixed annuities very attractive relative to the interest-bearing alternatives.
Conversely, the narrowing spread with Treasurys that began in June 2003 has been accompanied by a general decrease in fixed annuity sales. Spread relative to bank certificates of deposit is considered a particularly important driver of bank fixed annuity sales, for obvious reasons.
Higher interest rates tend to favor sale of market-value adjusted annuities over other fixed deferred product types. This is largely because the MVA policies pay what amounts to a bonus if the owner surrenders the contract when rates decline in the future. This pattern was born out in the “Beacon Research Fixed Annuity Premium Study,” which shows that participating carriers saw MVA sales increase 14% in 3rd quarter 2003, when rates were somewhat higher than the previous quarter.