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Eric Henderson. (Photo: Nationwide)

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Account Value Drop Cools Annuity Exchanges: Nationwide's Eric Henderson

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What You Need to Know

  • Higher rates are already improving the guarantees issuers can offer, says Eric Henderson, president of Nationwide Annuity.
  • But clients who switch variable annuities now could lose guarantee protection and lock in losses.
  • Rising interest rates also mean higher rates on fixed annuity products.

Falling stock prices can hurt efforts to help variable annuity owners take advantage of improving product guarantees.

Eric Henderson, president of Nationwide Annuity at Nationwide Financial, talked about that challenge Friday, in an interview.

He said that rising interest rates are helping insurers offer higher rates on fixed products, and better benefits guarantees for holders of variable annuities.

Advisors want to move clients via 1035 exchanges from annuities with no guarantees, or weak guarantees, into new products with stronger guarantees, but, in many cases, “that’s not happening,” Henderson said.

The clients may have products that protect them against loss of contract value, if they keep assets in the contract. If those clients shift assets into new annuities, they will could lose some or all of the guarantee protection and lock in losses, Henderson said.

That means a client who has contributed $100,000 to an annuity, with a guarantee protecting $100,000 in contract value, might be able to move only a smaller amount, such as $80,000, into an annuity with a higher rate.

What It Means

Advisors with clients who hold annuities with account values affected by decreases in stock prices may simply have to wait until the values have recovered to move the clients’ assets.

Advisors who believe that some clients should accept contract value losses and move assets anyway may have to work harder than usual to explain for their recommendations.

Nationwide’s Annuity Business

Henderson is in charge of an annuity business that generates about $16.5 billion in direct written premiums per year.

Nationwide ranked sixth in the United States in terms of 2021 annuity considerations market share, with 5.1% of the national annuity considerations total, according to data from the National Association of Insurance Commissioners.

The Columbus, Ohio-based company’s 2021 annuity considerations were comparable to the 2021 gross domestic product of Mozambique.

“We’re excited about the absolutely fantastic year we had last year,” Henderson said.

The company’s registered index-linked annuities and nonvariable indexed annuities performed especially well, he said.

New LIMRA figures show overall U.S. individual annuity sales increased 9% between the first half of 2021 and the first half of this year.

The third quarter is just three weeks old. At this point, third-quarter annuity sales seem to be similar to second-quarter sales, Henderson said.

5 More Annuity Observations

Here are some other things Henderson is seeing now.

1. The supply of the derivatives contracts remains strong.

Life insurers use derivatives — institutional financial arrangements designed to pay off when interest rates, stock prices or other values change — to provide some types of annuity investment options.

Life insurers also use derivatives to manage exposure to interest rate changes and stock price changes.

The supply of derivatives looks healthy, Henderson said.

2. Clients really are nervous.

Rising prices are spooking even clients who have learned to accept stock market volatility, Henderson said.

3. Few clients are brave enough to “buy the dip” in the variable annuity market right now.

In theory, variable annuities with limited or full account value guarantees should be ideal investments for confident clients who want to buy stocks when timid souls are hiding under the beds.

In the real world, “people are scared,” Henderson said. “They’re staying on the sidelines more.”

4. Annuity pricing makes sense.

Two years ago, Henderson said, he saw some froth.

This year, he said, “the market overall is fairly rational.”

The issuers owned by private equity firms and other nontraditional owners do seem to be pricing a little more aggressively, based on different ideas about investment returns, he reported.

5. Annuity industry messaging is on the right track.

Henderson said he thinks insurers and industry groups are telling consumers the right things.

“We’re all big believers in protecting people,” he said.

The challenge now is giving people who are scared the confidence to make retirement savings decisions, he added.

Eric Henderson. (Photo: Nationwide)