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The Forces Hitting Fixed Annuities Now

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Many forces are affecting todays fixed annuities, including federal budget deficits, equity markets, competition and more, but “interest is the principal driver,” noted Noel J. Abkemeier at the annual meeting of the National Association of Fixed Annuities in Orlando.

At the meeting, NAFA adopted a new tagline”working for a secure future”to signal its now broader focus. The Milwaukee-based organization was originally an equity index annuity trade group, but it has since extended its purview to all forms of fixed annuities.

Abkemeier is consulting actuary in the Williamsburg, Va., office of Milliman Inc. He and other speakers addressed many trends that have been impacting the fixed annuity business in recent years. National Underwriter obtained copies of talks given at the meeting.

The picture speakers drew was one of challenge, response and opportunity.

For example, in his remarks, Harry N. Stout, president and CEO of LifeStar Financial Network, Salt Lake City, noted that “the volatility of interest rates and their precipitous drop, along with the decrease in corporate spreads, has created a situation where insurance carriers cannot support their fixed rate products and make targeted returns.”

As a result, carriers have had to take several “significant” actions, said Stout, who is also deputy CEO of Fidelity & Guaranty Life. These actions include those shown in the box on this page.

In turn, these events have caused “significant producer and consumer concerns and confusion,” Stout said.

To show the range of the changes, Stout, in one example, compared the advantage that fixed annuity interest rates had over bank certificates of deposit in 2004 and 2003, based on figures from as of March 26, 2004. On the 5-year contract, “the annuity rate advantage over CDs has shrunk by 30 basis points, or 42%,” in 2004 compared to 2003, Stout said.

Interest affects not only crediting rates on annuities, said Millimans Abkemeier, but also the investment choices of the annuity companies, profit targets, commissions and other business factors.

When rates are low, for example, this can spur insurers to offer multi-year guaranteed annuities (which guarantee the policys interest rate for several years, as stated in the contract). These annuities can be an attractive option for the carriers to offer when competing against variable annuities during an equity boom, he points out. But when the yield curve is low at all points, MYGAs lose some of their attractiveness, he cautioned.

The MYGA products tend to rebound when the yield curve steepens and/or rates rise, Abkemeier added.

Where equity index annuities are concerned, interest rates and the product type have a “love-hate” relationship, he continued. For example, fixed annuity carriers love high long-term interest rates because the rates strengthen the hedging budget, he said. But carriers hate high short-term interest rates because they increase the hedging cost. His advice? “Pray for steep yield curves.”

On the flip side, when interest rates rebound, Abkemeier said, MYGAs gain attractiveness while Treasury-indexed products become less attractive. In such an environment, “EIAs could thrive.”

Key risks facing the business include geopolitical risk and related global tensions, U.S. political uncertainty, and jobs creation risk, noted LifeStars Stout.

Other risks he identified are: Compression of spreads in annuity products and carrier ability to support product pricing; tax reform; and regulatory threats (including initiatives to require security licensing of advisors who sell equity index products).

But there are opportunities to embrace as well, said Stout. These include what he called the “demographic steamroller,” or those individuals representing $4.4 trillion in assets who will reach retirement age in the next 10 years. This makes for increasing retirement needs and planning awareness.

Also, consumer risk profiles have changed as a result of the protracted bear market, Stout said.

Fixed annuities are in the consumers “sweet spot,” he contended, because they offer “tax deferral, guaranteed minimum returns, guaranteed monthly incomes for life, and protection of income and principal.”

At the meeting, NAFA elected Michael H. Ebmeier as chairman. He is vice president, brokerage annuity sales at Fidelity & Guaranty Life, Baltimore. Other officers are: Joan E. Boros, Esq., of Jorden Burt LLP, Washington, vice chairman; Ronald S. St. Jean, president of SJMS, Reston, Va., secretary; and Charles T. French, of Desher, Pa., treasurer. Kim OBrien, president of American Brokerage LLC, Milwaukee, is executive director.

Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 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.