Fixed Annuity Sales Hit Fourth Consecutive Quarterly Record

U.S. sales of fixed annuities continued strong in first quarter 2009. Estimated sales of $34.9 billion were 78% ahead of a year ago, 2% above the prior quarter, and the largest in six years–the fourth consecutive quarterly record shown in the Beacon Research Fixed Annuity Premium Study.

There was continued first quarter demand for conservative investments in response to difficult economic conditions. Unemployment rose and gross domestic product shrank at a 5.75% annual rate–an improvement over fourth quarter’s 6.2% decline, but still grim. The S&P 500 dropped 18% over the quarter.

With the highest savings rate in 19 years, many consumers had the funds to buy fixed annuities and the conservative-minded had an incentive to do so. A steepening Treasury bond yield curve gave fixed rate annuities a continued advantage over bank certificates of deposit, money market funds and Treasuries.

But in other ways, conditions were less favorable than in fourth quarter. Credited, cap and participation rates fell, mainly because of less favorable yields on the corporate bonds used to back fixed annuities. The spread in their yield over Treasuries narrowed with an easing of the flight to safety. In addition, the one- to 10-year corporate bond yield curve was V-shaped, with rates lowest in the middle.

Longer term bond yields also declined, and this lowered income annuity payouts.

Some issuers also lowered rates to non-competitive levels in order to limit sales. Others raised minimum premiums or reduced commissions. A few carriers terminated agents and distributors, stopped contracting with new agents or shut down new business altogether. These companies lacked the reserves to support another big surge in new business due to investment losses (realized or not). Too much strain on capital could trigger serious ratings downgrades, jeopardizing their ability to do business.

Given these constraints, the first quarter’s record results were a real achievement.

In terms of sales by product type, book value (fixed rate, non-market value-adjusted) annuities were the big winners. They had their best quarter in six years, and were the only product type to grow quarter-to-quarter (12%), as well as period-to-period (98%). Most of these products are sold in banks, where they had a rate advantage over CDs.

Percentage-wise, sales of fixed rate annuities with market value adjustments grew the most compared to first quarter 2008 (180%), and fell the most from the previous quarter (-12%). Lower credited rates had a lot to do with the quarter-to-quarter decline. But first quarter 2009 was still the second-best period for MVAs since 2003.

Independent producers remained the most important MVA channel but as a group, broker-dealers outsold them.

Indexed annuities had their second-best quarter in four years despite the bear market, continued regulatory uncertainty and efforts by some issuers to keep sales in line with strained reserves. Results were up 24% from a year ago and down just 1% from fourth quarter.

With 88% of sales, independent producers remained by far the most important channel.