The fourth quarter’s results truly made 2008 a banner year for fixed annuities.
The quarter’s estimated sales of $34.1 billion set a third consecutive 6-year record and pushed the annual total to an estimated record $107 billion, up 60% from 2007.
These results are not surprising because 4Q conditions converged to create a perfect storm of fixed annuity favorability.
A bear market prevailed in 4Q, and by December 31, the Dow stood at 8,776–down 2,055 points (19%) from October 1. Equity mutual funds had net outflows throughout the quarter as the flight to safety continued.
Although it fluctuated a lot, the yield curve not only remained positive but steepened slightly. Treasury rates generally fell, pulled down along with 3 Fed rate cuts and pushed lower by security-seeking demand.
But fixed annuity rates did not follow the same pattern. They rose in October and November, thanks to the yield curve and a widening spread between Treasury and corporate bond yields. Credited rates at the important 5% threshold level were available throughout 4Q–well above rates offered by bank certificates of deposit and other conservative alternatives.
Coupled with the ongoing flight to safety, this resulted in another big quarter for fixed rate annuities. Non-market value adjusted (non-MVA) annuity sales rose 23% from the prior quarter.
But 4Q really belonged to market value adjusted annuities, the sales of which were up 76%. MVA sales grew so much that they actually surpassed indexed annuities for the first time since the first quarter of 2003.
Indexed annuity sales were up only 3%, but that gave them their best quarter in 4 1/2 years despite the bear market and the Securities and Exchange Commission’s mid-December decision to regulate them as securities in 2011.
Buyers apparently saw considerable upside potential in indexed annuities, given the quarter’s low stock prices. Together with the products’ downside protection, guaranteed lifetime withdrawal benefits and higher cap rates, this was an attractive value proposition.
Immediate annuities had their best quarter in 6 years on a 3% quarter-to-quarter increase. Dependable monthly income became more attractive relative to systematic withdrawals from shrunken retirement savings, especially since payouts were up and the inflation rate was minimal.
Sales of participants in our study increased in all distribution channels compared to 3rd quarter 2008 and also to a year ago (with one minor exception).
But 4Q will be remembered as the time that captive agents and broker-dealers truly became important for the distribution of fixed annuities, partly to compensate for falling sales of variable annuities. Results for B-Ds as a group rose 316% over a year earlier, the largest percentage increase among the channels. Captive agents’ sales climbed 154%.