Beacon CEO: Fixed-Annuity Writers Deliberately Pulling Back Sales Amid Low Interest Rates
December 4, 2011 by Fran Matso Lysiak
|By Fran Lysiak|
A.M. Best Company, Inc.
Total third-quarter 2011 U.S. sales of individual fixed annuities, including indexed, declined 7% from the same period a year ago and from the second quarter, to about $19 billion, according to Beacon Researchand the Insured Retirement Institute.
As long as low interest rates persist, “it’s going to be a struggle for traditional fixed annuities,” said Jeremy Alexander, chief executive officer of Beacon.
From the second quarter to the third, Treasury rates, in particular, the 10-year Treasury note, continued to decline even more than corporate bonds, Alexander said, referring to widening credit spreads, a positive for the industry. That means money continues to flow into Treasuries, bringing down the yield on Treasuries. Life insurers invest in corporate bonds.
Fixed annuity writers look for a certain spread, or the difference between the amount earned versus the amount credited to the policyowner, and some companies continued to obtain that spread during the third quarter, Alexander said. As rates continue to go down, “they’ve in effect, increased their target spreads.”
The paradox is that even with widening credit spreads, companies are “throttling back sales,” Alexander said, noting some are deliberately controlling sales of fixed annuities because they don’t necessarily want the business in this economic environment.
Allianz Life Insurance Company of North America, a unit of Germany’sAllianz SE, captured first place in third-quarter sales of these retirement savings and income products, with sales of $1.61 billion, according to Beacon. The last time Allianz was the leader in overall sales was the fourth quarter of 2010.
Capturing the No. 2 spot was Western National Life Insurance Co., a unit of American International Group (NYSE: AIG), with sales of $1.34 billion.
American Equity Investment Life Insurance Co., a unit of American Equity Investment Life Holding Co. (NYSE: AEL), with sales of $1.26 billion took third place, while Aviva USA, a unit the U.K.-based Aviva plc, with sales of $1.25 billion, came in at No. 4.
Allianz Life, American Equity and Aviva primarily sell indexed annuities. Indexed captured 43% of the fixed-annuity market in the third quarter, exceeding the more traditional fixed-rate annuities — book-value and market-value adjusted — which had 40% market share, according to LIMRA.
With indexed annuities, an insurer invests most of the principal in bonds to ensure the policy will generate a small annual return but uses a small portion of the premium to buy options in a stock market index, often the S&P 500. Options that are exercised can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.
Features that are appealing to consumers are riders — such as the lifetime withdrawal benefit and the death benefit riders, which are now competing with similar riders on stock market-linked variable annuities, Alexander noted.
Rounding out the top five in overall sales was New York Life, the top seller of immediate fixed annuities, with sales of $922 million, according to Beacon.
The average five-year fixed annuity yielded only about 1.51% interest in November, according to Beacon. Competing fixed-income investments, such as the five-year Treasury note, were paying about 0.91%, which meant bank CDs were around there, too.
In September, the Federal Reserve’s latest move to spur economic activity in the United States meant more dismal financial news and likely lower earnings for the life insurance industry. The central bank instituted its “Maturity Extension Program and Reinvestment Policy,” or “Operation Twist” (Best’s News Service, Sept. 23, 2011).
Speaking during a recent A.M. Best Co. webinar, Ken Frino, group vice president of A.M. Best’s life/health rating division, said variable annuities with guarantees and traditional fixed annuities are the annuity products that could be most impacted by low interest rates. To watch a replay of the webinar, “The Impact of Low Interest Rates on Life and Annuity Insurers,” visit http://www.ambest.com/webinars/rates2011
(By Fran Matso Lysiak, senior associate editor, BestWeek: firstname.lastname@example.org)
|(c) 2011 A.M. Best Company, Inc.|