US Sales of Fixed Annuities Drop 1.1% in 2011 Amid Historic Low Interest Rates
April 6, 2012 by Fran Matso Lysiak
Best’s News Service – April 04, 2012 03:30 PM
EVANSTON, Ill. – Amid historically low interest rates, total 2011 sales of fixed annuities in the United States, including indexed, dropped 1.1% from 2010 to $75.6 billion, according to Beacon Research and the Insured Retirement Institute.
The low interest rate environment has made it tough to sell fixed-rate investments of any kind, said Jeremy Alexander, chief executive officer of the Evanston, Ill.-based Beacon.
Fourth-quarter sales of these retirement-savings and income products were relatively flat from the 2010 fourth quarter. However, “as we expected, seasonality and the worsening interest rate environment drove a sequential drop in fourth quarter’s results,” Alexander said. Fixed annuity sales declined 8.8% from the third quarter.
Sales “typically fall to a certain level when the rate environment is unfavorable and remain there until rates and the yield curve improve,” Alexander said. The fourth quarter “may prove to be the period when results bottomed out.”
Demand for bonds is driving yields down. The yields insurance companies receive on their investments are slowly declining, as old bonds, for example, mature or are prepaid, and that money must be re-invested at today’s lower yields, according to Beacon. The Federal Reserve’s actions in recent months also are driving down yields.
Lower investment yields means insurers must reduce all kinds of rates, such as credited rates on fixed annuities, cap rates on indexed annuities, as well as commissions, among other rates, according to Beacon. Fixed annuity writers also are being “very selective” in the amount of premium they’re bringing in, Alexander said, noting they’re looking for spread.
For 2011, Western National Life Insurance Co., a unit of American International Group (NYSE: AIG), was the top seller of fixed annuities, with sales of $6.6 billion, according to Beacon. The company moved up from fifth place where it ranked in 2010.
Western National did very well in banks, with a lot having to do with the flexibility of its product, Alexander said. Banks can trade off compensation, or lower their own compensation, for rate, with Western National’s products, he said, noting the company is flexible with regard to credited rate/commission trade-offs, as long as it meets its own profitability targets.
With rates being so low, that gave banks a “nice lever” to work with, Alexander said.
In the fourth quarter, Allianz Life Insurance Company of North America, a unit of Germany’s Allianz SE, was the No. 1 seller, with sales of nearly $1.5 billion, according to Beacon. Capturing second place was American Equity Investment Life Insurance Co., a unit of American Equity Investment Life Holding Co. (NYSE: AEL), with fourth-quarter sales of nearly $1.4 billion.
Aviva USA, a unit the U.K.-based Aviva plc, ranked third, with fourth-quarter sales of $1.2 billion and in fourth place was Western National, with fourth-quarter sales of $1.1 billion.
Allianz Life, American Equity and Aviva primarily sell indexed annuities. Total sales of indexed annuities in the United States stood at $32.3 billion in 2011, essentially unchanged from 2010 but the percentage of fixed annuities sold that were indexed grew to 45% last year, according to AnnuitySpecs.com, a firm that tracks this data (Best’s News Service, March 28, 2012).
With indexed annuities, an insurer invests most of the customer’s 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.
Rounding out the top five was New York Life, which continued as the dominant issuer of immediate annuities, with fourth-quarter sales of $923 million, according to Beacon. New York Life got “some traction” with its deferred income product, Alexander said. A deferred income annuity, the same as longevity insurance, begins payments at least 14 months after purchase, and usually five to 10 years or more after purchase.
New York Life’s new deferred income annuity was successful to the extent that it reportedly motivated several other carriers to begin developing their own, the firm said.
Deferred income annuities occupy a middle ground between fixed deferred and immediate annuities. But Beacon said it considers deferred income annuities to be in the category of immediate annuities because payouts are calculated and guaranteed at the time of purchase.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com) BN-NJ-04-04-2012 1530 ET #
