Fixated On Fixed Annuities

Although fixed annuity rates have fallen about one percent across the board since last fall, overall sales of fixed deferred annuities continued at record levels in the first quarter of 2009 as investors fled equities and sought safe, productive havens for their money at rates that certificates of deposit can’t match.

U.S. sales of fixed annuities were an estimated $34.9 billion in first quarter of this year, up 2% from the previous quarter and up 78% from the first quarter of 2008, according to Beacon Research’s survey of 53 insurance companies with 86% of the market.

Sales were concentrated in book value annuities, with premiums of $19.2 billion, up from $17.2 billion in the fourth quarter of 2008. Sales of market value adjusted (MVA) annuities, indexed annuities and immediate annuities were all down to varying degrees from the previous quarter. All products sold well above their first quarter 2008 levels.

The bank channel and the independent producer channel continued to account for most fixed annuity sales, with $9.3 billion and $9.2 billion, respectively. They were followed by captive agent channel ($5.48 billion) and large/regional broker/dealer channel ($2.31 billion, up from only $548 million in the first quarter of 2008).

MetLife, which captured a large market share last fall by offering stellar rates—reportedly enabled by investments in low-priced corporate debt—was the top-selling issuer for the second consecutive quarter, with $3.63 billion in fixed annuity sales, down from $4.14 billion in the previous quarter.

Three of MetLife’s contracts were among the ten best-selling annuities in the first quarter. Its Target Maturity product was the best-selling MVA annuity. Overall, MetLife was the top-seller in independent and large/regional broker-dealers and wire houses.

MVA contracts, in which early withdrawals are marked up or down to reflect changes in interest rates since purchase, typically offer slightly higher returns than book value products, whose rates are guaranteed for one or more years.

“MetLife is adapting very well to the market. It’s one-year MVA sold really well in the large/regional broker-dealer channel, where advisors are looking for a place to park their clients’ money and get a good rate,” said Jeremy Alexander, president and CEO of Beacon Research.

New York Life was second with sales of $3.47 billion in the first quarter, a 35% increase from $2.57 billion in the previous quarter. New York Life was first in book value sales and immediate annuity sales. Aviva and MetLife was the leader in indexed annuity sales, respectively.

New York Life announced in April that it had added 100 new hires in the bank channel, where it is the leading seller of fixed annuities. The number of internal sales specialists increased by 100%, regional wholesalers by 30%, retirement income specialists by 50%, and other service staff by 40%.

But the surprise of the quarter was RiverSource Life. Its Rate Bonus 1, a book value annuity with a one percent premium bonus and a five-year rate guarantee, leapt to first place in sales from 23rd in the previous quarter. RiverSource moved up to fourth from eighth in overall fixed annuity sales. The company, whose products are distributed by American Express advisors, also dominated the captive agent channel. (See chart below.)

By product type, estimated first quarter 2009 sales were: book value, $19.2 billion; indexed, $7.1 billion; market value-adjusted (MVA), $6.5 billion; immediate, $2.1 billion. These estimates all reflect increases from first quarter 2008. Compared to the previous quarter, however, sales of MVAs were down 12%, immediates dropped 10% and indexed annuities fell one percent.

Immediate annuities payout rates dropped sharply in the first quarter. According to data provided by immediateannuities.com, monthly payouts are down about eight percent from their peak. The decline has coincided with falling yields of high-quality corporate bonds, whose prices have recovered from panic-driven lows last fall.

Aside from the flight to safety, fixed annuity sales are benefiting from a steep yield curve, which means that longer-term bonds offer much higher returns than shorter-term bonds. When the yield curve is steep, fixed annuities usually outsell certificates of deposit, whose returns are tied to short-term debt. This is a marked change from the mid-2000s, when the yield curve was flat or inverted. But the 2007 drop in short-term rates by the Fed changed that.

“We’ve got the steepest yield curve ever,” said Alexander. “Last week there was a huge sell-off in Treasuries. The yield on the 10-year Treasury rose to 3.695% from 3.491 the night before. People are just not going long.”

Investors want higher yields from longer-term debt because they think the Fed will be forced to raise interest rates in the future. The Fed will have to raise rates, the logic goes, to fight the inflation that some expect will follow the government’s current fiscal and monetary policies, which are to raise spending to unprecedented levels and keep interest rates at historic lows.

While fixed annuity sales are at record levels, some industry wags say sales would be higher if the capacity of some life insurers had not been weakened by the recession and stock market decline.

In the indexed annuity world, “there are symptoms that companies have more business coming in than they can handle and are doing things to slow things down,” said Noel Abkemeier, a Milliman analyst. “For instance, Aviva has cut commissions by a half percent and raised the charge for their guaranteed lifetime withdrawal benefit (GLWB) on indexed annuities a bit. I see [the lack of capacity] clearly in indexed annuities. It should be equally applicable in fixed rate annuities.”

“Fixed annuity rates are down about one percent from the fourth quarter of 2008,” Abkemeier added. A typical rate for a five-year fixed annuity was 4.5% last Thanksgiving but has since fallen to about 3.5%. Ten-year contracts have come down from about 5.23% to 4.25%.

“There’s probably less competitive product on the market,” said Alexander, “but there are enough dollars out there. No [investors] are getting turned away. We continue to be bullish on the fixed market. I think we still have some substantial quarters ahead of us.”

“The scale of the shift is remarkable. In 2007, the total for year was $66 billion,” he added. “We just did almost $70 billion in two quarters. Fixed annuity sales are running ahead of variable annuity sales by 15%. We’ve never seen a market like this before.”

Source: Fixed Annuity Premium Study, Beacon Research, Evanston IL

Source: Fixed Annuity Premium Study, Beacon Research, Evanston IL

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