The 2nd quarter 2008 should turn out to be a good one for fixed annuity sales. And unless conditions change significantly, it also looks like 2008 will be a better year than the industry has seen for sometime.
The 2nd quarter’s economic environment resembles that of the 1st quarter 2008, which was favorable for fixed annuities according to sales results tracked by Beacon Research.
Like money market mutual funds, fixed annuity sales benefited from a flight to safety in reaction to a litany of economic woes that pointed toward recession. The housing contraction deepened and the credit crunch worsened. Consumer confidence fell and spending weakened. Bankruptcies and foreclosures skyrocketed. March unemployment figures approached a three-year high.
In the 1st quarter 2008, there were also inflationary pressures from the weak dollar and rising commodities prices. In reaction, the equities market was turbulent and trended downward. The S&P 500 dropped 10% (145 points) from the 1st quarter’s beginning to its end.
Conservative investments of all kinds looked good in comparison.
Interest rates generally fell during the 1st quarter 2008. Falling rates are usually negative for fixed annuity sales. But this time around, short-term rates fell more than long-term rates, thanks mainly to 3 rate cuts by the Federal Reserve totaling 200 basis points.
As a result, the yield curve (the spread between 1- and 10-year Treasuries) steepened dramatically. This gave fixed interest annuities a competitive rate advantage over Treasuries, money market mutual funds and, most importantly, bank certificates of deposit.
Also, sales of book value products (fixed interest annuities without market-value adjustments) rose nearly 25% from the previous quarter. Book value products are the predominant fixed annuity type sold in banks. Sales typically take off when they have a rate advantage over CDs. Thanks to broker-dealer production, fixed interest annuities with MVAs were up 11.5% quarter-on-quarter. (See table.)
Fixed interest annuity growth was enough to push the 1st quarter’s total sales 7.2% above the 4th quarter 2007, even though sales results for the other 2 product types–index annuities and single premium immediate annuities–were down.
The 1st quarter sales of index annuities dropped 11.5% from 4th quarter 2007. Because these products credit mainly based on changes in equities indices, it’s not easy to sell their upside potential return when most forecasts point to a bad year for the stock market. The vast majority of 1st quarter 2008 promotions we’ve seen stressed downside protection instead. Results probably would have been significantly worse if not for these products’ heavily promoted guaranteed lifetime withdrawal benefits, in particular.