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Life Health > Annuities > Fixed Annuities

Bank Annuity Sales: Fixed Still Hot, VAs Not

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Banks sold $3.1 billion in individual annuities in May, about $100 million above the April level, but 35% more than in February. Fixed annuities continue to outsell variable annuities in banks by a wide margin–better than two-to-one in May.

The monthly sales estimates were computed for National Underwriter from the Kehrer-Equitable Distributors Monthly Bank Investment Services Monitor, which tracks annuity and mutual fund sales from 30 banks and thrifts.

Fixed annuities have accounted for two-thirds of bank annuity sales so far in the second quarter, a dramatic reversal from the second quarter last year, when VAs outsold fixed annuities in banks.

Market factors. Market conditions since the beginning of the year have increasingly favored fixed annuities over VAs, mutual funds and bank certificates of deposit.

A tumbling equity market discouraged risk-taking and pushed many individuals who invest where they bank to look for safe harbors. Since last November, the spread between the underlying new money crediting rate on fixed annuities and one-year CDs increased from the slim 41 basis points level to 85 basis points by May, according to the Kehrer Bank Fixed Annuity RateWatch.

As new money rates on fixed annuities improve relative to short-term CD rates, fixed annuities attract more of the money that would otherwise be deposited in CDs. Thus, fixed annuities were the investment of choice for many shell-shocked investors during the past several months.

The outlook for bank fixed annuity sales remains strong, as the spread between new money rates on fixed annuities increased to 102 basis points in mid June.

Bonus rates. Since the late 1980s, banks have used bonus rates on fixed annuities to spur sales. Traditional fixed annuities guarantee the crediting rate for the first year, and reset the rate on the contract anniversary. By reducing the sales compensation received from the insurer, a bank is able to sell a product that pays additional interest the first year–the bonus rate.

Through most of the 1990s, the typical bonus rate annuity had reduced sales compensation of 1% and credited an additional one point of interest during the first year of the contract. But in recent years, faced with the growing attractiveness of variable annuities and mutual funds, fixed annuity underwriters have introduced “super bonus” annuities that pay first year bonuses of up to 4%.

In May, the crediting rate on the leading bonus annuities tracked by the Kehrer Bank Fixed Annuity RateWatch was 145 basis points above the base (non-bonus) rates on fixed annuities, and 230 basis points above the bellwether one-year CD. Thus, attractive super bonus rates have also been stimulating fixed annuity sales in banks.

In mid-June, the highest bonus rate offered among the 26 products covered by the monthly Kehrer Bank Fixed Annuity RateWatch was 7% from Jackson National Lifes OptiMAX 100, followed by 6.75% from American General Life & Annuitys Bonus Annuity.

Multi-year guarantees. In the last year, bank fixed annuity sales have also been rejuvenated by the introduction of new multi-year guarantee products, which match the interest rate guarantee period to the length of surrender penalties. These products enable banks to offer higher interest rates without reducing sales compensation.

According to the Kehrer Bank Fixed Annuity RateWatch Plus, the new five-year guarantee products are crediting 80 basis points higher interest than the traditional one-year guarantee products. We estimate that the multi-year guarantee products are now capturing half of bank fixed annuity sales.

DCA rates. Between 1999 and 2000, bank VA sales were fueled by the high interest rates paid on dollar cost averaging account promotions. Insurers used high DCA rates to attract lump sum investments into a Dollar Cost Averaging account that was systematically invested in selected VA portfolios over six or twelve months. In a sense, the DCA rates were competing with fixed annuity and CD rates. That was no contest, because the average six-month DCA rates were sometimes 500 basis points higher than new money rates on fixed annuities and 550 basis points higher than one-year CDs. And the more aggressive rates (15% to 16%) created spreads that were twice as high. As a result, some insurers reported that over half of their VA premium was being deposited in DCA buckets.

Slowing bank VA sales this year are partly the result of a pullback by insurers on aggressive DCA rates. According to the Kehrer Bank vawatch, the average 6-month DCA rate at the end of the second quarter was 10.5%, down from 10.8% last quarter and 11.1% a year ago. Nine companies reduced their six-month rates since March (Aegons RIB I and II, Allstates Putnam Allstate Advisor, American Generals Elite Plus Bonus VA, Equitables Accumulator, ING/Golden Americans Premium Plus, Safecos Spinaker VA, Sun Lifes MFS Regatta Platinum and the Transamerica/Dreyfus Triple Advantage). Only Fortis, Hartford and Pacific Life increased six-month DCA rates.

Twenty-seven of the 31 products monitored by vawatch currently offer special 6-month DCA rates, the same number as last quarter. During June, 6-month DCA rates on vawatch products ranged from a low of 5% on ING/Golden Americans extra-credit Premium Plus VA to a high of 14% offered on 4 products–American Skandias ASAP II, Fortiss Opportunity Plus VA, and both the Putnam Capital Manager and the Director from Hartford. Most products (70%) offered 6-month rates of between 9% and 12%.

During the second quarter, 28 of the 31 vawatch products offered special one-year rates ranging from a low of 4% on INGs Premium Plus VA to a high of 9% on four products, Allstates Glenbrook Provider, American Generals Elite Plus VA, Fortiss Opportunity Plus and Sun Americas Polaris II VA.

Thirteen companies reduced their 1-year DCA rates since last quarter, while no companies increased their rates. The average 1-year DCA rate on vawatch products stood at 7.4% in June, down from 7.7% in March and 8.4% one year ago.

is head of Associates, a Princeton, N.J., consulting and research firm.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 27, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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