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January 04, 2009 at 07:00 PM
The 3rd quarter of 2008 will be remembered as the one when all hell broke loose as the economy tanked. But it was also a quarter where estimated fixed annuity sales set another 5-year record, at $27.1 billion.
Now, it looks as if there is more of the same to come.
Ordinarily, record FA results would not be achieved when Treasury yields plummet. But 3Q sales benefited from the same flight to safety that produced equity mutual fund outflows and drove such extreme demand for 3-month Treasury bills that the yield actually turned negative on September 17 for the first time since 1940. So, estimated FA sales rose in each consecutive month of 3Q, with September the best month in the 5-year history of the Beacon Research Fixed Annuity Premium Study.
In addition, FA credited rates rose in July and August, in part because the spread between Treasuries and corporate bonds widened throughout 3Q. Rates at or slightly above 5% were available-and heavily promoted-throughout the quarter, giving FAs a definite advantage over bank certificates of deposit and the like.
Book value and market value adjusted annuities posted double-digit increases relative to 3Q 2007 and the prior quarter. Fixed single-premium immediate annuity sales also saw double-digit growth relative to 2007 and 2Q 2008, driven by demand from aging baby boomers and older seniors.
As for indexed annuities, these sales rose about 9% compared to 3Q 2007 and they managed to hold their own quarter-to-quarter, even though equities prices were lower. It appears that buyers expected equities prices to increase enough that indexed annuity credited rates would eventually exceed those of fixed rate FAs. The sales were helped by the August stock market rally, higher cap rates and intense promotion of guaranteed lifetime withdrawal benefits with income account step-ups and premium bonuses.
When comparing the reported 2008 declines in variable annuity sales with indexed annuity sales, it certainly seems that annuity buyers care about account values, GLWBs notwithstanding. This is borne out by the double-digit fixed rate growth versus indexed growth.
If account values matter, the near-term outlook is positive (barring the unforeseen). FA sales in 4Q 2008 should post another increase, making 2008 the best year for FAs in the last five. The economy has worsened, and FAs in general should benefit from an ongoing flight to safety.
