The multi-year guarantee (MYG) annuity sales rally is over.
The average rate on a one-year MYG dropped to 1.4% in August 2009, down from 3.4% a year earlier, and the 5-year dropped to 3.1% from 4.4%. (Data from Fisher Annuity Index, Dallas, as reported in the August 2009 Annuity Sales Buzz, an e-newsletter published by National Underwriter.)
Although the August 2009 MYG rates were still above the 1% paid on typical bank 1-year certificates of deposit, it wasn’t enough to get people buying.
In 2010, based on past cycles, bank rates should start rising at a faster rate than bond yields. That means MYG sales will be off until the interest cycle turns again.
What about prospects for indexed annuities? On March 31, 2009, the S&P 500 closed at 797.87 and the average 1-year CD rate was over 1%. In this environment, it is not surprising that indexed annuity sales hit a new record in the second quarter.
It appears that at least some of that MYG business was swayed to indexed annuities that marketed a first-year premium bonus as a guaranteed yield.
Also contributing to IA sales is the fact that the products having guaranteed lifetime withdrawal benefits offer growth rates or large bonuses–and some consumers may have confused these for a current yield.
Even without income riders, indexed annuities have a strong story to tell; it simply needs to be presented well.
CD owners may balk at buying the IA with the 6% interest cap because they fear they might earn zero if the index goes down. However, they might be told, “If you move to the annuity, you may lose the 1.1% that the bank is paying, but if you stay at the bank, you will lose the potential to make 6%. Which is the greatest potential loss?”
It should be noted that IA sales doubled when the last bull market began.
Adding a GLWB to an existing variable annuity often drove total fees up to 3% before the market crash. Today, the same VA may have lower guaranteed growth, a lower payout and a higher GLWB rider fee that pushes total fees in some cases to 4% or more.
Because indexed annuities do not have the downside volatility of variable annuities, the GLWB hedging costs are far less, so guaranteed growth and payouts are often higher and fees much lower.
The perceived IA disadvantage of not participating in all of a market uptick is lessened if a 3% to 4% haircut is applied to the competing vehicle. Indeed, returns of a fixed rate annuity with a GLWB could even be competitive with a variable annuity with a GLWB if the VA’s higher fees are deducted from returns of a middling stock market.
However, just as variable annuity carriers under-reacted to potential losses and made earlier GLWB riders too attractive, many appear to have overreacted to the market crash. If that proves out, the GLWB payouts should improve a bit as carriers get some of their swagger back.
Some pundits were predicting the near-death of variable annuities at the beginning of this year. However, income and growth riders have been redesigned and this should help next year’s sales. Still, rising sales will depend on a rising stock market.
The bulk of VA sales are from 1035 policy exchanges between carriers. But right now, a lot of existing contracts are “in-the-money,” in that the guaranteed values are higher than the market value. If the stock market quits rising, it could be unsuitable to cause a customer to lose a higher guarantee with a swap to a new policy. For that reason, overall sales would suffer.
The next 12 months will be a difficult time for annuity sales, less so for indexed annuities and more so for MYGs and variable annuities. However, the outlook beyond is very optimistic.
In addition to demographic changes that will drive more people to look at annuity income retirement options, the behavioral shift in attitudes caused by the prolonged financial crisis will make consumers more risk averse and looking for guarantees. This means the future for annuities is bright.
Jack Marrion is president of Advantage Compendium, a St. Louis, Mo. research and consulting firm on annuities. His e-mail address is firstname.lastname@example.org.