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July 26, 2001 at 08:00 PM
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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%.
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.