Fixed Annuities On Track For A Record-Setting 2008

Estimated single premium immediate annuity sales were up 15.3% quarter-to-quarter. Slightly higher long-term rates helped, but demand from the oldest baby boomers was the main factor. More promotion of inflation-adjusted payouts may have had an impact as well. Results were 29.5% above the same period last year.

As of early September 2008, more volatility has marked the 3rd quarter. Equities prices slid from June through mid-July as conditions soured. Consumer confidence hit another all-time low. Mutual fund flows indicated another flight to safety. Then, on August 8, oil prices dropped on a stronger dollar. The stock market rallied and consumer confidence improved. Things were certainly looking up until the stock market dropped 3% on September 3, reacting to bad news on employment and retail sales. And, in contrast to 2nd quarter 2008, interest rates have been falling.

So why expect 3rd quarter 2008 to be another good one for fixed annuity sales? For one thing, indexed annuities should benefit from the August equities market rally, along with continued high cap rates and attractive GLWBs. Also, conditions favor fixed rate annuities. The yield curve hasn’t changed much, so these products have had a continued competitive rate advantage. And although interest rates have been dropping in general, it wasn’t hard to find fixed annuities crediting 5% in July and August.

It’s true that many annuity issuers lowered rates in September. But advance announcements of upcoming rate drops probably stimulated “get them while you can” sales in the 2nd half of August; most of these sales will be booked in September.

What’s more, SPIAs are likely to do well mainly because of underlying demand.

Probably the biggest unknown at this point is whether and when the Securities and Exchange Commission will decide that indexed annuities are securities. But this is not likely to have a big impact on sales in 3rd quarter 2008 or the remainder of the year. Even if the SEC decision occurs in September, as initially announced, implementation will be delayed for some time by legal challenges and may be avoided altogether.

Of course, should indexed annuities eventually become classified as securities, sales can be expected to fall substantially. To prepare for this possibility, many of the major indexed annuity carriers are focusing new attention on fixed rate products.

But it is also the case that fixed annuity issuers of all kinds are responding to market conditions. For instance, a number of book value annuities were introduced in 3rd quarter 2008, a level of new product activity that hasn’t been seen for some time. As both a reflection of and a stimulus to demand, this bodes well for these products through the rest of 2008. This is good for fixed annuity sales in general, because book value annuities now generate about half of all sales.