Fixed annuities were smoking in second quarter. Smoking hot, that is. According to the latest individual annuity sales estimates from LIMRA Secure Retirement Institute (LIMRA SRI), total fixed annuity sales hit $25.2 billion in second quarter, up 34 percent from the same period last year.
For the first half, fixed sales totaled $49.1 billion, up 39 percent from first-half last year.
Variable annuities did not fare as well, in terms of growth. Those sales fell 5 percent in second quarter compared to last year on sales of $36.2 billion. On a first-half basis, they fell 4 percent on sales of $70.4 billion compared to last year, according to LIMRA SRI.
The results for both annuity sectors echoed those of first quarter. That’s when fixed sales rose by a stunning 43 percent over the same year earlier quarter on sales of $23.5 billion, while variable annuities fell by 3 percent on sales of $34.2 billion.
A new annuity dynamic
The performance in both product lines brings to the foreground what may be a leading dynamic in the annuity business, a dynamic forged by retirement demographics.
Time was when fixed annuities made their strongest gains when interest rates were high or rising, and that variable annuities soared when the stock market was making big gains. Yet that was not the case this year.
In both second and first quarter, fixed annuity sales climbed higher and higher, even though interest rates did not go up. In fact, interest rates fell; for instance, the 10-year bond rate dropped from 3 percent at year-end 2013 to not quite 2.6 percent at the end of second quarter. Similarly, variable annuities declined even though the stock market reached new highs in both quarters (the Dow closed second quarter at 16,851, yet another new high).
The throng of the eldest baby boomers, now in their late 50s and early- to mid-60s, may account for much of the fixed annuity gain this year. Industry research shows that those who are at or near retirement are more interested in financial products with guarantees than with the opportunity to reap big gains in the stock market (absent of guarantees).
Other factors were also at work in both sectors. These include the continued downsizing of variable annuity production by some carriers, the debut of new derisked variable annuities by other carriers that some sales agents deemed as unattractive, the proliferation of a wide assortment of fixed products geared for today’s market, and a generally more optimistic business environment this year.
But those factors are in addition to the impact of rising demand for guarantees among older buyers, especially older boomer buyers. For instance, in an Allianz Life survey last year, 87 percent of boomers aged 55 to 65 indicated they felt more attracted to a financial product with 4 percent guaranteed return than a product offering an 8 percent return that could lose value due to market downturns.
On a dollar comparison basis, variable annuities did outperform fixed annuities in second quarter, as per usual. However, the performance gap between variable and fixed has narrowed.
For instance, in second quarter 2014, variable policies sold $36.2 billion versus the $25.2 billion sold in fixed policies, according to LIMRA SRI numbers. That made for a gap of $11 billion. By contrast, in second quarter last year, the gap was $19.2 billion ($38 billion for variable versus $18.8 billion for fixed). And in second quarter 2008, before the Great Recession hit its nadir, the gap was $16.4 billion ($42.2 billion for variable versus $25.8 billion for fixed).