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In what may be a surprise to some, fixed annuity sales are expected to grow at a faster rate than variable annuity sales in the next few years and should reach $130 billion by 2008, according to LIMRA International, Windsor, Conn.
Fixed annuities were the dominant annuity product until the 1990s, when the annuity industry directed most of its attention and energy toward the development and marketing of its variable products. Variable annuities experienced rapid sales growth from the mid-1990s through 2000.
The stock market downturn and slow recovery led many investors toward a more conservative approach to investment. This risk aversion has been reflected in very strong sales growth among fixed annuities: Sales skyrocketed from $53 billion in 2000 to $103 billion in 2002. Sales then dropped to $89 billion in 2003, and with $43 billion in sales during the first half of 2004, fixed annuities will probably have a relatively flat year in 2004. Thereafter, fixed annuity sales should improve.
Based on the LIMRA forecasting model, 2004 fixed annuity sales should rise about 2% from 2003 levels (see chart on this page). Subsequently, fixed annuity sales are expected to increase each year at an annualized growth rate of 9.3% through 2008. (Note: The modeling technique used here accounts for variation in historical sales data, combined with econometric projections of several key factors.)
A variety of economic and demographic factors, as well as increased use of equity-indexed fixed annuities, favor this trend. For example:
Economic factors: Growing fears of inflation, an improving economy and mounting federal debt have placed a great deal of upward pressure on interest rates. Although these factors will conspire to keep fixed sales relatively stagnant in 2004 over 2003 levels, ultimately they will lead to more attractive crediting rates for newly issued FAs.
Although the economy has improved since the early 2000s, the recovery has been slow and uneven. Moreover, few expect a return of the market conditions of the mid- to late 1990s. As a result, returns on variable products might not be sufficiently high to offset their inherent market risk. Therefore, dollars invested in annuities could be more likely to flow into fixed products (as well as fixed funds within variable products).
Demographics: Perhaps more important than economic projections for understanding long-term sales trends are the underlying demographics of the United States. The leading edge of the enormous baby boomer generation is only a few years away from turning 60. Older customerswho tend to be more conservative and are more likely to buy fixed products than younger peoplewill represent a larger and larger proportion of all annuity buyers.
