Three percent "is the new 5% when it comes to fixed annuities," the chief executive officer of
Total second-quarter 2013 U.S. sales of fixed annuities, including indexed, were
The improved interest rate environment helped boost sales. "We think that 3% is the new 5% when it comes to fixed annuities," Alexander said. "We are seeing threes — finally. If rates keep going up, and carriers loosen up their cash a little, we should see a real nice bump in sales."
2012 had represented the fourth-straight year of annual sales decline for these retirement saving and income products (Best's News Service,
In addition to the quarter's rising interest rates, the steepest, or widest, yield curve in nearly two years allowed companies to raise the rates they offered on fixed rate and indexed annuities, according to Alexander.
As for the 10-year Treasury bond recently hitting 3%, Alexander noted that the 10-year Treasury is a sort of bellwether as it's among the benchmarks that insurers use when it comes to their investments. "It was the first time in a long time we started to see distributors putting out marketing materials touting rates. That is a huge indicator, a leading indicator, as to what we expect to see happening, assuming rates continue to rise."
Companies "won't put product on the street unless they can make enough money on it," he said. There's been a lack of supply in this market from companies because it's not profitable enough to put out low rates with narrow spreads. But if the industry continues to see the 10-year hit higher rates, "that's a positive indicator for more sales."
Regaining leadership in overall sales of fixed annuities was New York Life, with second-quarter sales of
Remaining in second place was
Rounding out the top five was Great American Life, with sales of
With indexed, the 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, usually 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.
"In previous quarters, demand for lifetime income was balancing headwinds from low interest rates," said
Although an emerging product that now represents a tiny slice of the overall market, sales of deferred income annuities, the same as longevity insurance, were up almost 40% from the first quarter due, in part, to larger payouts and new product introductions, according to Beacon.
A deferred-income annuity occupies a middle ground between fixed-deferred and immediate annuities. If the payouts begin within 13 months of purchase, it's an immediate and if the payouts begin more than 13 months after purchase, it's a deferred-income annuity, which "generally provide larger payouts" than single-premium immediate annuities, according to Beacon's chief marketing officer (Best's News Service,
Several large mutual life insurers are among the major sellers, including New York Life,
New York Life is the leader in deferred income annuities, Alexander said, noting however, that it's currently a small portion of the company's overall fixed annuity business.
Insurers are attracted to these products because they can invest much longer term, Alexander said, noting the carrier is not stuck dealing with low rates in a short-term environment. If it's only investing out three to five years and rates are low and there are narrow spreads, that's not financially attractive but if a company can go out 30 years, not only does it have more potential for upside, especially if it believes rates will be higher down the road, they're "a fairly safe bet," he said.
Earlier this month,
Unlike a fixed deferred annuity, which someone might cash out of or move five years down the road, deferred-income annuities will be on the insurance companies' books for a long time, Alexander said.
The immediate annuity business is solid because companies know they can make the bet on mortality, "and that's a bet that almost any carrier that's been in the business can make money on," Alexander said. To a large extent, these are similar to selling an immediate annuity, and companies know how to price product, based on mortality, he said.
Interestingly, though, much of the gains Beacon has seen in sales have not been in the independent channel but primarily in the career agent channel, Alexander said. "Right now, we're not seeing broad-based acceptance of these products across all channels."
|Copyright:||(c) 2013 A.M. Best Company, Inc.|
|Source:||A.M. Best Company, Inc.|