Estimated fixed annuity sales of $24.6 billion set a 5-year record in the second quarter of 2008. The third quarter results should be strong as well, even though some conditions will have changed.
Conservative investments like fixed annuities generally do well during troubled economic periods like 2nd quarter 2008. That’s not to say it was a totally gloomy quarter. Durable goods orders and productivity rose. The trade deficit narrowed on strong export performance and this fueled growth in the Gross Domestic Product. Equities prices improved somewhat.
But the economy continued to struggle with the same woes that beset 1st quarter 2008. Inflationary pressures increased with rising commodities prices and a weak dollar. Unemployment rose and consumer confidence fell to new lows. The credit crunch worsened, with predictions of huge bad loan write-offs yet to come. The housing market crisis deepened. These conditions motivated a continued, though less pronounced flight to safety.
Fixed annuities benefit from such flights to safety when they have a competitive advantage over conservative alternatives. They had such an advantage in 2nd quarter 2008, even though the yield curve flattened because short-term rates rose more than long-term rates.
Of course, sales were strongest in April, when the yield curve was steepest and lower in each successive month. But estimated June sales were still well ahead of any month in 1st quarter 2008 or 2nd quarter 2007.
Both market value-adjusted and non-MVA (book value) fixed rate annuities did well. Credited rates of 5% were heavily promoted, with frequent comparison to lower rates on bank certificates of deposit. Estimated MVA sales rose 54.4% from the prior quarter, and book value results were almost one-third ahead. Compared to 2nd quarter 2007, there was eye-popping growth of 104.8% for non-MVA and 89.2% for MVA annuities.
The S&P 500 index ended the 2nd quarter 90 points (6.6%) lower than it was on April 1, 2008, but the general trend was upward.
This helped indexed annuities, which overcame negative publicity from an ill-informed Dateline NBC televised report and other sources (as well as regulatory uncertainty) to make a 20.1% comeback from 1Q 2008.
Indexed annuity results also benefited from higher cap rates and heavily-promoted guaranteed lifetime withdrawal benefits, sweetened by premium bonuses and generous step-ups. Guarantees of premium were promoted as well, to an extent not seen previously. Sales were 4.5% ahead of 2nd quarter 2007–impressive because equities prices were significantly higher last year.