Annuities issuers strive for investors' 'sweet spot'
March 29, 2010 by Joe Gardyasz
While many frantic investors were watching the values of their 401(k) nest eggs plummet by 40 percent or more in the stock market last year, others were turning to the guaranteed safety of indexed annuity contracts, which drove sales of the complex investment-insurance hybrid products to record levels in 2009.
Sales of indexed annuities in the United States exceeded $30 billion in 2009, which was 10 percent higher than the previous record set in 2007.
This year, expect continued growth in the indexed annuity market as well as the adoption of these products by more insurers, said Sheryl Moore, president and CEO of AnnuitySpecs.com, a Web-based research firm based in Pleasant Hill.
Several Greater Des Moines-based insurance companies are on the leading edge of the growth trend, particularly Aviva USA and American Equity Investment Life Insurance Co., which last year were the No. 2 and No. 3 indexed annuity sellers in the country, respectively, behind the top-selling indexed annuity issuer, Minneapolis-based Allianz Life Insurance Company of North America, which had 18.43 percent of the market share last year. By comparison, Aviva sold 18.38 percent of indexed annuities in 2009. (See chart).
“There’s never been a greater demand for fixed and indexed annuities than now,” Moore said. Her firm’s Indexed Sales & Market Report tracks the sales of 44 indexed annuity carriers, which represent 99 percent of indexed annuity production. She founded AnnuitySpecs nearly six years ago after having worked as an annuities analyst for Aviva USA and Principal Financial Group Inc.
“There are a couple of things that aggregated here,” Moore said. “For one, the primary products (indexed annuities) compete against are certificates of deposit,” which currently are paying historically low interest rates, she said.
Also, fixed annuities and indexed annuities look much more attractive to investors when their 401(k) balances are declining by double digits and they begin realizing, “I could lose some of my money,” she said.
At the end of 2009, indexed annuity sales accounted for 12.82 percent of total annuity sales in the United States, according to AnnuitySpec.com’s Indexed Sales & Market Report.
First introduced in 1995, indexed annuities are a relatively new but increasingly dominant part of the annuity industry. Though they have been treated as insurance products that are subject to state insurance department regulations, the insurance industry has been fighting enactment of a federal rule categorizing the products as investment securities that would be regulated by the U.S. Securities and Exchange Commission (SEC). (See sidebar on page 12)
The SEC rule was prompted by consumer complaints regarding sales tactics of independent agents selling indexed annuity products.
Skyrocketing indexed annuity sales outstripped the capacity of most insurers’ capital reserves during last year’s tight credit market. As a result, many carriers ratcheted down their sales efforts by reducing or restructuring agent commissions or otherwise limiting the amount of new sales they would take on, Moore said. Had it not been for capital limitations, sales could easily have exceeded $35 billion last year, she said.
Indexed annuities, also known as fixed indexed annuities or equity-indexed annuities, are annuity contracts in which an insurer offers the purchaser an investment return based on changes in an equity index such as the Standard & Poor’s 500 index, while also providing for a guaranteed minimum return and guaranteed minimum value.
Despite the contract guarantees, indexed annuity holders can still lose money if the guarantee is based on an accumulation amount that’s less than the full amount of the purchase payments, warns the SEC in a online consumer bulletin. “In many cases,” according to the agency, “it will take several years for an index annuity’s minimum guarantee to ‘break even.'”
Additionally, annuity holders may be subject to significant surrender charges and tax penalties if they cancel the annuity contract early.
From Aviva’s perspective, indexed annuities are sitting “in the sweet spot” of customers’ risk tolerance, said John Currier Jr., executive vice president and chief product officer for Aviva USA.
“It provides some benefit of upside, but the bottom line is there’s a cumulative guarantee for the customers, and that really resonates with people,” he said. Consequently, “the product is really well-positioned to grow in the marketplace.”
Indexed annuities, which in 2009 made up 76 percent of Aviva USA’s total life and annuity sales, are the company’s “bread-and-butter product,” Currier said.
Aviva USA’s operating profit increased to $320 million in 2009, up 43 percent from 2008.
For West Des Moines-based American Equity, 2009 was “a record-setting year in every way,” said Wendy Waugaman, president and CEO of American Equity Investment Life Holding Co., in a recent conference call to investors. The company, which sold a record $3.7 billion in annuities last year, reported 2009 net income of $68.5 million, compared with net income of $15.9 million in 2008.
“As we enter 2010, we’re in an extremely strong capital position, and that’s good as we enter a favorable sales environment in 2010,” Waugaman said during the call. In January alone, the company had record-breaking sales of $236 million.
In 2009, American Equity had “a very strong sales climate for the entire year due to the insecurity of the stock market, low interest rates and lack of other safe-money alternatives,” said Ron Grensteiner, president of American Equity Investment Life Insurance Co., the holding company’s main operating subsidiary.
“Several of our competitors also contributed to our sales growth by reducing their sales targets and taking rather drastic measures to slow down their sales growth,” Grensteiner said. “American Equity was in a position to accept the business, and it is our intent certainly to keep these producers on board by giving them the best experience they’ve had from any insurance company.”
Tapping the brakes
Though Aviva USA’s life insurance and pension sales were down 20 percent in 2009 compared with the previous year, indexed annuity sales were up 19 percent, which reflected enhanced relationships with key product distributors, the company said in its fourth-quarter earnings release.
“As the U.S. economy begins to recover, we anticipate a growing demand for products which guarantee the security of the customer’s original investment, and we want to be able to capture that demand, without compromising our desire for improved profitability,” the company said.
Moderating the pace of indexed annuity sales growth last year was a “very tough decision,” Aviva’s Currier said, but a necessary one to preserve the company’s financial strength.
“Annuities do take capital to write,” Currier said, “so we want to maintain a strong financial position and a position of strength coming out of the financial crisis. So we did make sure that we were modulating our annuity growth after an amazing record run-up in late 2008 and early into 2009.”
American Equity couldn’t take on all the business it wanted, either. Last year, the company ceded 20 percent of its annuity sales through a co-insurance agreement to keep its business matched to its capital, the operating company’s chief financial officer, John Matovina, told investors.
“Our ultimate goal is to keep 100 percent of the business we can produce, but we will do that only if the capital position, and the capital we produce, can support that position,” he said.
Moore said she can “count on one hand” the companies that have said they could take all the indexed annuity business producers wanted to give them last year, which is part of what made it a tough year for independent agents.
Agents are finding they’re having to work harder than they did in the past year, because they’re having to find different companies that they can work with, she said. “There is all sorts of research that goes into that relationship.”
Nevertheless, Moore said she anticipates continued strong indexed annuity sales into 2010, as well as significant new players entering the market.
“There will be some new large insurance companies developing index and fixed annuity products this year, so that will add some more legitimacy to the market,” she said. Moore declined to provide names of specific companies, citing confidentiality agreements. “But I would say that some very highly rated companies that weren’t interested in the market before are now asking about it,” she said.
“My hypothesis about this is that these companies’ sales of variable annuities went down significantly, so they’re looking for other products to direct these sales to.”