Buyers of 2 different types of fixed annuity contracts are sending mixed messages about interest rates.[@@]
FA buyers’ growing interest in multi-year contracts has surfaced in results from the quarterly FA market survey conducted by Beacon Research Publications Inc., Evanston, Ill.
The firm bases the survey report on data for 213 U.S. fixed annuity products from 47 manufacturers.
Contracts with 1-year guarantee periods accounted for 77% of sales of “book value” fixed annuities during the second quarter, down from 82% during the second quarter of 2004, Beacon says.
But, in the “market value adjusted” fixed annuity market, products with shorter guarantee periods accounted for about 40% of sales, up from 36% in the second quarter of 2004, Beacon says.
An MVA fixed annuity pays a declared rate of interest for a specified period. When a holder takes some or all of the assets out of an MVA annuity during the annuity contract term, the issuer exposes the holder to some interest rate risk by adjusting the market value of the annuity to reflect changes in a specified interest rate benchmark, according to Beacon.
Book value fixed annuities also pay a declared rate of interest for a specified period, but the issuer does not impose a market value adjustment if the holder takes some or all of the assets out of the annuity before the end of the contract term, Beacon says.
When FA buyers favor 1-year rates, that’s a sign that 1-year rates seem especially high or that buyers expect interest rates to rise in the near future, experts say.
When FA buyers shift toward multi-year contracts, that may be a sign that the multi-year rates seem high or that buyers expect interest rates to fall or hold steady.