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Will fixed-rate annuity assets stay or bolt from banks?

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Since banks and career agents manage nearly two-thirds of fixed-rate annuity assets for clients, they have a great deal of input regarding the fate of those contracts once surrender charges expire. That was the thesis of a research brief written by Matthew Drinkwater and Jafor Iqbal, both associate managing directors with LIMRA’s Secure Retirement Institute (SRI).

To get an idea of the scope of their management footprint, LIMRA reviewed statistics from the second quarter. At that time, banks controlled 40 percent ($166 billion) of the total $414 billion in retail fixed-annuity assets. Furthermore, in 2008 and 2009, banks sold roughly $60 billion in fixed-rate annuities, which means the five-year policies sold in those years are on track to exit their surrender penalty period this year and next. Another 40 percent are already beyond that stage. Therefore, banks are in “a unique position to influence fixed-rate annuity surrenders and sales in the next few quarters,” the LIMRA researchers write.

Meanwhile, career agents manage about one-quarter ($100 billion) in fixed-rate annuity assets. However, Drinkwater and Iqbal contend that it’s “unlikely they will recommend moving assets out of these accounts.”

Conversely, independent agents, independent broker-dealers and full-service national broker-dealers oversee 24 percent of fixed rate annuity assets collectively, yet they have other investment options to offer to clients on their platforms. That suggests those assets could bolt when the surrender charges disappear.

The LIMRA researchers highlight the fact that independent agents, independent broker-dealers and full-service national broker-dealers have higher cash value surrender rates for annuity assets without surrender charges compared to career agents. But, they have less of a potential impact on overall surrender rates because those three channels account for just 18 percent of total retail fixed-rate annuity assets without surrender penalties, the LIMRA researchers maintain.

Perhaps the most impactful factor that will influence surrender rates is how banks set long- and short-term CD rates. CDs and fixed-rate annuities typically compete for investor dollars in the same fixed-income realm. Though low now, surrender rates on fixed-rate annuities could rise if interest rates improve. If CDs offer better returns, carriers may have a more difficult time retaining their fixed-rate annuity assets, Drinkwater and Iqbal conclude.

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