Banks' fixed annuity sales fell 16% in the fourth quarter from the previous quarter and 43% year over year, according to Beacon Research's Fixed Annuity Premium Study. That followed a 13% drop from the second to the third quarter.
Beacon's figures are based on a snapshot of 10 major banks, representing 86% of total sales. Those banks sold $285.6 million in fixed annuities in the fourth quarter, versus $292.4 million in the third quarter. Only three of the 10 — Wells Fargo, SunTrust and M&T Bank — managed to eke out single-digit, quarter-over-quarter growth.
"It's almost all a question of rates right now," said Judith Alexander, director of sales and marketing at Beacon. "The demand for corporate bonds is now easing off, but most recent net flows have been toward bond funds, which drove down yield. Fixed annuities are primarily backed by corporate bonds, and as the spread between corporate bonds and Treasuries kept narrowing, fixed annuity rates narrowed too."
CD rates, fixed annuities' primary competition, are based on Treasury rates, so they suffered too. "At one point in 2008 Treasuries went negative and there was still a stampede to buy them," Alexander said. "But in 2009, many people just got sick of no returns." Variable annuity sales started to pick up in the fourth quarter to fill the gap, and indexed annuities did well all year, doubling sales from $1 billion in 2008 to $2.1 billion in 2009.
According to Beacon's figures, five-year fixed annuities paid just 4 basis points more than Treasuries in January, 18 in February and 8 in March, so Alexander does not expect a turnaround anytime soon. However, as the economy starts moving again and corporate bonds start to behave normally, fixed annuity sales should start to recover, she said.
That could take a while, said Geoffrey Bobroff of Bobroff Consulting. Twelve to 18 months is a reasonable outlook for that to happen, but even then the question is how much will the Fed raise rates. "When the economy starts to recover it'll happen more rapidly, but as long as unemployment is where it is, rates won't go up much," Bobroff said. "It's unlikely [fixed annuity] sales will improve until interest rates start to rise."
Banks aren't holding their breath, said Heywood Sloane, managing director of the Bank Insurance and Securities Association in Wayne, Pa. "The trend among program managers last year was for there to be much less reliance on fixed annuities," he said. "There was more focus on variable annuities, and life insurance, which represented 2% in total sales in 2007, went up to 5% in 2008 and 8% last year. Fixed annuities look like they'll continue to shrink as part of the pie."
Investors are more interested in other forms of income right now, such as high-quality stocks that pay dividends and real estate investment trusts, Sloane said.