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.
Treasury rates have been dropping, but fixed interest annuities have had a continued rate advantage for most of 4Q. Fixed immediate annuity payments are probably more attractive than ever to shell-shocked retirees and their advisors. Indexed annuity sales are likely to decline in reaction to lower equities prices, but not enough to drag down overall results.
What about 2009? As of this writing, the economy is officially in recession and it appears it will remain so at least for most of next year, despite the stimulus package planned by the incoming Obama administration. If that is the case, it should be another good year for FAs.
Now that the Securities and Exchange Commission has adopted its proposed Rule 151A reclassifying indexed products as securities, indexed annuity sales will probably fall substantially at first and then recover after an adjustment period, but not to pre-registration levels. The SEC made the rule effective for contracts sold after Jan. 12, 2001. Thus, indexed annuity sales are likely to decline due to equities market conditions and the higher costs of hedging, which probably will result in lower caps.
Fixed rate and SPIA sales should be strong enough to more than compensate for the drop-off in indexed results.
The current downturn may also affect investor behavior even after economic recovery. A significant segment of the buyer market is likely to become more conservative, especially those who are 10 years or less from retirement. If so, FA sales will continue to grow for the foreseeable future.
All these predictions assume that the public continues to have confidence in the fixed annuity issuers. This is not a certainty because asset deflation is creating a major challenge for the life insurance industry.
Even the relatively conservative investments of many issuers have declined in value, placing pressure on capitalization and liquidity at a time when additional capital is not easy to come by. As a result, 7 life insurers have applied to become federally-regulated lending institutions in order to qualify for federal aid. Industry observers have expressed concern, and at least one has predicted a decline in investor/policyholder confidence. Should that confidence be shaken, all bets are off.
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]