The Next Fixed Annuity Market Shift
The fixed annuity business is starting to go through yet another market shift.
This comes nearly three years after fixed annuities started stealing the show, in terms of sales growth, when variable annuities hit a slump caused by the stock market downturn.
FAs are still selling well in many markets, but some FA insurers are curbing their sales in response to the low interest environment. In the field, producers report seeing reduced product selection, lower credited rates, lower guaranteed minimum interest rates and other changes (see Chart I).
The shifts are not apparent in all regions. But most insiders agree the industry is in flux. How producers are responding is the focus here. First, a recap:
“Until recently, we have always had a plentiful supply of CD-type fixed annuities,” says Alan Nadolna, president of Associates In Financial, a Northbrook, Ill., agency. Now, availability has diminished.
The CD-type products are fixed annuities that guarantee the interest rate for one- to 10-year periods. Some are “multi-year” FAs that offer several guarantee period options in one contract. Typically, surrender charges on CD-type annuities end when the guarantee period ends. Commissions on these products are in the 2% range–low, in comparison to the 4%+ of traditional FAs (which credit interest annually, subject to a guaranteed minimum).
The most noticeable retrenchment is in CD-type annuities having maturities in the one- to five-year range, says Jeremy Alexander, president of Beacon Research, an Evanston, Ill., fixed annuity research firm. The Treasury bills that back these products are very low right now, he explains, alluding to the information in Chart II.
CD-type products with the longer maturities–of six to 10 years–are more plentiful, Alexander adds. Thats because Treasury yields on the longer maturities are higher, meaning “carriers could possibly make more money on those annuities,” he says.
Other market changes being reported include:
Newer fixed annuity designs often have features that add to product complexity, says Nadolna. Examples include traditional FAs with first-year bonuses followed by low renewal interest rates and market value adjustments on cash outs. “That is contrary to what the FA is supposed to be about,” he contends.
Commissions on a number of traditional FAs have been falling, say several agents.
Traditional FAs–without bonuses–still can be had but at substantially lower new and renewal rates than last year, report marketers.
New FAs are arriving in many shops with minimum interest rates in the 1.5% to 2% range–much lower than the 3% widely available last year and earlier this year. These lower-minimum products are not yet ubiquitous, but most believe they soon will be.
FAs in general are facing renewed competition from variable annuities with fixed account options having competitive interest rates, says Nadolna.
(Note: 2nd quarter 2003 financial results shown in NUs online Hot News service support this observation. The reports indicate VA deposits are up at many insurers while FA deposits are down compared to the year-earlier period. Some reports show VA fixed account deposits are up, too.)
Overall, “its a mixed bag,” says Danny Fisher in reference to the current FA market. He is president of The Fisher Agency, a Dallas agency and brokerage, and publisher of The Fisher Annuity Index, a fixed annuity compendium.
Fisher notes his personal production has been running ahead of last year through most of the summer. In fact, “I picked up a lot of new clients in the last year,” he notes.
But, in August, he says, business has been slower.
The slowdown may be in response to the possibility that FA rates may rise as have, say, mortgage rates, he suggests. He tells of one client who recently asked to have his $50,000 check returned. The man had just brought it in earmarked for a fixed annuity deposit. Now, says Fisher, “he wants to hold the money until he sees if annuity rates will rise.”
Currently, he notes, FA interest rates are still quite low. Chart I shows the rate trends reported in The Fisher Index Annuity, his service.
Also, he says, the number of products available for sale is down–to 618 policies from 93 reporting companies as of Aug. 4, 2003, from 865 policies from 101 companies on Aug. 5, 2002.
For producers, the question is, how to navigate in this changing environment?