It's Looking Good For Fixed Annuity Sales In 2Q 2008

Sales of single premium immediate annuities were down a less dramatic 4.9% quarter-on-quarter. This might seem strange because the oldest baby boomers started turning 62 in 1st quarter 2008, and many of those choosing to retire will need the monthly income that SPIAs can provide to supplement Social Security payments. But long-term rates fell from the prior quarter and SPIA payouts decreased as a result. This, in turn, dampened sales. Also, many purchases were likely postponed because the market expected rates to rise (and indeed they have).

Because of the rising rate environment, the 2nd quarter looks a lot like the 1st quarter for fixed annuity sales, only better.

The long-term trend in equities prices is downward and the market remains turbulent. The same economic problems remain. There is a continued flight to safety, as occurred when 10-year Treasury sales surged on June 5, 2008. And though the yield curve has widened and narrowed, it’s been in pretty good shape through mid-June.

All of this points to another good quarter for fixed interest annuities. Higher long-term rates should improve SPIA sales too, but rising rate expectations may hold sales below what they otherwise would be.

Index annuity results are more difficult to predict. Cap rates in the products have increased as high as 10% in some cases; this should provide a boost. But will consumers be attracted by upside potential during difficult stock market conditions, especially when credited rates of 5% are readily available on fixed rate annuities? Even if sales of these products drop again, though, this probably won’t be enough to prevent another increase in overall sales.

So far, this article has omitted comparison to 1st quarter 2007 results. Some readers may think this strange, since period-to-period comparisons are the norm in discussions of this kind. But the 2 periods have almost nothing in common. In 2007, the 1st quarter was the worst for fixed annuities since the Beacon Research Fixed Annuity Premium Study began in 2003. Yield curve inversion and a strong equities market made it very difficult for fixed annuities to compete in the same period last year. The only similarity is that credited rates were low by historical standards.

But 2nd quarter conditions do seem to resemble those of the 3rd quarter 2004. On June 6, 2008, the yield curve was steeper than at any time since that quarter. The equities market was volatile with a downward bias back then, too. And the unemployment rate was 5.5% in both October 2004 and May 2008.

It’s encouraging to note that total estimated fixed annuity sales were $23.1 billion in 3rd quarter 2004–that’s 23% above 1st quarter 2008. Only time will tell if this year will see quarterly sales at that level. But 2008 is shaping up to be the most interesting and dynamic year for fixed annuities in quite some time.

Jeremy Alexander is chief executive officer of Beacon Research, a fixed annuity data and application service provider in Evanston, Ill. His e-mail address is [email protected]