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?
For one thing, agents should not view the changes as a deterrent, suggests Fisher. “There are still products around with competitive rates. For instance, Im looking at one right now that is offering 4.5% guaranteed for five years, for deposits of $100,000 or more.
“You have to look for them, but they are there.”
Furthermore, although policy count has dropped, many companies already have filed replacements, says Fisher. These should become available in coming months.
Also, remember that fixed annuities–even those with the lower interest rate floors–still have an advantage over bank certificates of deposit, which are now paying 0.5% to 1% interest, says Nadolna of Illinois.
Comparatively, “I can offer a client a three-year CD-type annuity paying 3%,” he says. “That will help the person accomplish a short-term goal. And, since many annuity buyers are well into their 50s, many policies will mature after the owners are age 59 1/2, so they can pull the money out or leave it, without penalty.”
Another suggestion: To get a higher rate for the client, sell FAs that pay lower commissions, says Fisher, pointing to the commission ranges on Chart I.
Perhaps ladder the money, using, say, one-, three- and five-year CD-type annuities, offers Ernie Boyd, president of Boyd Financial Services, Amarillo, Texas. This way, the client can lock in respectable yields in the five-year product but still keep open the opportunity of investing for higher rates (if they exist) in one or three years, when the shorter-term products mature.
Focus on recommending “simple, straightforward products” with “no rigmarole,” recommends Nadolna. In todays market, that translates into selling FAs that pay 2% commissions, not 4% or more, he says.
To get a 4% commission in todays market, Nadolna adds, agents would need to sell FAs with bonus interest rates or other conditions. That is contrary to his goal of simplicity.
Several agents are avoiding trust-me contracts, even if they have a good front-end bonus” and higher commissions. These are traditional FAs with a guaranteed first-year interest rate and renewal rates that are declared annually thereafter, subject to the minimum guarantee.
Boyd no longer offers trust-me plans. The problem with these products, he says, is their renewal rates are unknown, and in recent years they have been lower than new money rates. “People are looking for safety today, not risk,” he says.
Furthermore, “I want people to be happy with their purchase years from now, not just in the first year.”
Still, if interest rates start to rise, agents might want to consider the more traditional products after all, says Alexander. In particular, he recommends using FAs with portfolio rate financing, not block rate financing. The former is likely to pay a rising credited interest rate as general portfolio rates rise, while the latter locks in particular rates, he explains.
Another strategy from Boyd: Stay open to using different carriers. Some previous carrier partners may have had rating downgrades or other changes that make them less attractive in todays environment, he explains.
Some of the highest FA rates right now are from fraternal societies, and some fraternals will accept business from brokers, adds Alexander.
One suggestion, concerning company ratings, meets with mixed reviews, however. Some producers maintain that conditions are such that agents should at least consider offering products from B+ rated companies as well as companies rated A.
The rates offered by B+ companies tend to be higher than those of A-rated carriers, which boast greater strength, explains Boyd. He says he discusses the differences with clients, but that “most go for the product from the B+ company, because of the rates.”
Those who want a high quality company do choose the A-rated company, Boyd adds, and they knowingly take the lower interest rate.
However, Nadolna of Illinois is firmly against using anything but A-rated companies. “Some B or B+ companies may be perfectly solid, and there may be very good reasons for their ratings” that may not pose risk to clients, he allows.
Even so, he thinks defensive caution is the better way to go. “I dont want to be in a situation where someone says, why did you get me into that company?” he explains.
Fisher, the Dallas broker, says he will recommend B+ companies–if he has checked them out and found them suitable. Given the number of rating downgrades in the past year, he adds, “I generally feel much better about using a company whose B+ rating was just reaffirmed than one whose A- rating has not been reaffirmed.”
The message for FA agents today, sums up Nadolna, is to be flexible. For instance, “be facile” and “be willing to move from company to company. Do your due diligence. And have a lot of wholesalers, because not all of them “have the same product.”
Finally, start thinking of fixed annuities as “an” answer for the client, not “the” answer, he says.
“Dont let the numbers (about declining policies available for sale or average interest rates) govern what you do,” adds Fisher. Products are still around that pay better rates than bank CDs, he stresses, and there are plenty of customers who want those products, even if the policies pay less than previously.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 18, 2003. Copyright 2003 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.