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Riding the FIA wave

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Fixed indexed are enjoying a surge in sales at time when other annuity products are slumping. One firm that has hopped on that wave is the Phoenix Companies, Inc. Two-and-a-half years after launching its fixed indexed annuity business, Phoenix has reached $1.5 billion in annuity funds under management.

The former variable annuity player made the switch to the FIA line in 2009, and according to Phil Polkinghorn, below, senior executive vice president and president, business development, for Phoenix, it did so for several reasons.

First, the independent distribution system for FIAs “plays better to us,” Polkinghorn said. It also fits into Phoenix’s capabilities in the areas of fixed income investment and hedging as well as product design and manufacturing, he added.

Further, back nearly two years ago, several carriers in the FIA space exited the business. “So it was a good time to move in as independent marketing organizations that depended on carriers for supply were in one way or another getting cut back,” Polkinghorn said.

Serving the middle market

Another strategic decision Phoenix made was to focus on the middle market, which Polkinghorn classifies as younger people with incomes between $60,000 and $150,000 and net worth under $1 million for the older set. “It’s a large market, and it’s arguably underserved,” he said. “You can benefit from bringing some creativity to serve the needs of this market because things like affordability and safety are of paramount concern.”

For this year, Phoenix’s goal is to gain around $1 billion in deposits, Polkinghorn said.

Reaching that goal will be aided by several factors swirling in the marketplace. Chief among them are the preference by retirees and near-retirees for a reliable income stream in retirement that is protected from the tumult of the stock market. That is why the industry in general and Phoenix in particular has seen an increase in consumers opting for the guaranteed lifetime income riders in FIAs, Polkinghorn noted. More than 90 percent of FIAs sold by Phoenix contain a guaranteed income rider. Generally speaking, a fee of between 60 and 100 basis points is deducted from the account balance for that benefit, Polkinghorn said.

Conservative appeal

FIAs appeal to conservative investors who desire to protect their principal yet don’t want to completely forgo the equity markets. “The presence of the guaranteed income riders on the product has made them more popular, particularly in a time of generally declining interest rates where those same conservative retiree’s alternatives are producing much less income,” Polkinghorn said.

Seven or eight years ago, when interest rates were higher, a conservative retiree could depend on interest from CDs for a reliable retirement income stream. Today, conservative investment vehicles like certificates of deposit are producing paltry returns, thus pushing those same conservative investors to FIAs with lifetime income riders. “If we were in a much higher interest rate environment, perhaps the guaranteed income riders wouldn’t be as popular because people would feel they could generate some income with interest from CDs or other vehicles,” Polkinghorn said. “But right now, the opportunity to generate meaningful income is challenged for a number of people who are retired or nearing retirement.”

How do FIA carriers pay for those benefits?

For FIA manufacturers, the challenge is how to pay for those lifetime income benefits. In recent months, several variable annuity players have either scaled back those riders or exited the business line altogether due to volatile market conditions and low interest rates.

For fixed indexed annuity underwriters, the challenge isn’t so much market risk, but longevity, Polkinghorn said. It’s more likely a FIA policyholder will deplete their account while alive and therefore, have to depend on the insurer for lifetime income, he conceded.

However, since the underlying crediting method in a FIA is more stable, funding those lifetime payouts is more predictable than with a VA, Polkinghorn said. “You are probably more likely to outlive your account balance in a fixed indexed annuity, but there aren’t as many scenarios where that is as severe as it could be in a very poor market for variable annuities,” he said.

There is an insurance pooling mechanism at work as well. Policyholders who live beyond their account balances are pooled with those who die before their account balance extinguishes, Polkinghorn pointed out.

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