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October 04, 2009 at 08:00 PM
By historical standards, second quarter 2009 was a good one for U.S. fixed annuity (FA) sales. At an estimated $27.8 billion, it was the third-best quarter in the 6 1/2 -year history of the Beacon Research Fixed Annuity Premium Study.
Results were 10% ahead of a year ago, but 20% behind first quarter 2009.
Investors became somewhat less risk-averse in the second quarter, but there was continued demand for conservative investments like FAs.
This makes sense given the economy. The recession began to ebb during the quarter. Gross domestic product shrank at a 1% annual rate, a big improvement over the first quarter’s 6.4% annualized decline. There were several signs of incipient recovery including a stock market rally. But rising unemployment fueled concern regarding future consumer spending and loan delinquencies, and dimmed the outlook for corporate earnings growth.
These concerns made the investing public cautious despite rising equities prices. Mutual fund money flowed out of money market funds and mainly into bond–not equity–funds. Variable annuity sales increased from the first quarter. It appears that guaranteed living benefits were driving much of the gain. In particular, the election rate for guaranteed lifetime withdrawal benefit riders reportedly reached a record high, even though many issuers had raised fees and reduced benefits.
Demand for guarantees probably would have resulted in another record quarter for FAs, if not for the interest rate environment and the new business capacity constraints of many carriers.
The market’s strong appetite for corporate bonds reduced their yields, and the yield curve of these bonds remained relatively flat. As a result, guaranteed minimum interest and credited rates in FAs declined over the second quarter. The average rate on a 5-year CD-type FA was 3.63% in April, 3.36% in May, and 3.25% in June.
A decline was inevitable, given interest rate conditions. But average credited rates probably slipped further and faster because some issuers were crediting lower than necessary in order to limit sales.
Demand for corporate bonds also narrowed the spread of their yields over Treasury rates. This gave FAs less and less advantage over the conservative alternatives. The spread of the average 5-year CD-type FA rate over the 5-year Treasury rate was 1.77% in April, 1.23% in May, and just 0.54% in June. Even if the FA rate advantage had been larger, credited rates were simply too low to be attractive for many potential buyers.
The threshold rate of 5% was more and more difficult to find as the quarter progressed, except on one-year renewal rate products.
Given all this, the second quarter was not favorable for FAs. Market value-adjusted (MVA) FAs were the only product type to post lower results (-2%) compared to second quarter 2008 and were 46% behind first quarter 2009. Book value (non-MVA fixed rate) results were not as grim. Sales were 9% ahead period-to-period, and 28% behind quarter-to-quarter.
