FSOkx: Financial Services Blog: Fortunes of Annuities Reflect State of Economy

Posted on   Feb 18 2010 2:07AM During the financial crisis, AIG, one of the largest insurers in the world, needed U.S. government’s help to stay solvent, while other insurers saw their stocks drop 70% or more in just a few months due to the uncertainty in the markets.  In such a volatile scenario, investors were attracted by annuities, which gave them opportunities for stable returns. Consequently, fixed annuities experienced heavy growth during the last quarter of 2008, hitting an all time high during the first quarter of 2009 with a growth of 74%. The situation is changing as the U.S. economy has started to show signs of recovery. The investors and retirees that had turned to fixed annuities have started turning away from them. Sales of fixed annuities fell by 20% in the third quarter of 2009. While various surveys show that roughly 15 to 25 percent of corporations offer annuities to workers who are retiring, a 2009 study reported that just one percent of workers actually opted for the annuity plans. The industry has been trying to address other concerns that investors have. For the concern about the underutilization of the investment during the life time, a minimum period guaranteed payment scheme to beneficiaries was introduced. For concerns over inflation, annuities with payments pegged to the consumer price index were introduced. Every time investors had an objection, such as the need for several payments at one time, a lump sum in an emergency or concern about rising interest rates, the industry created a rider to add to policies to satisfy their concern. The government is also supportive of growth of this segment. It has provided incentives like 50% waiver of taxes on the first USD 10,000 in annuity payouts each year. In future, the government may also provide an annual update of the estimated income the savings can generate. Given the state of the market, it is a little early to tell if these efforts will encourage investors to again start investing in annuity products. However, the fate of annuities until now has been a reliable indicator of the state of the U.S. economy in general and the confidence level of investors in particular.