(FREE) American investors are not ready to flee the investment market entirely, if sales of fixed annuities are any indication.
Total first-quarter 2009 sales of fixed annuities in the US, including equity-indexed annuities, jumped 78 percent from the same period a year ago, to an estimated $34.9 billion, according to consultancy Beacon Research.
The results mark the fourth consecutive quarter of growth in fixed annuities sales, said Jeremy Alexander, president and chief executive officer of Beacon.
MetLife retained its number-one spot in fixed annuity sales, with sales of $3.6 billion, according to Beacon, followed by New York Life, with sales of nearly $3.5 billion. Aviva USA, with sales of nearly $2.5 billion, ranked third, while RiverSource Life, a unit of Ameriprise Financial, took fourth place, with sales of $2.1 billion. Rounding out the top five was Aegon/Transamerica, with sales of $2 billion.
Broken down by product type, estimated sales of book value fixed annuities were $19.2 billion; $7.1 billion for equity-indexed; $6.5 billion for market-value adjusted and $2.1 billion for immediate, reflecting year-over-year increases for all product types, Beacon said.
Further evidence of the power of fixed annuities can be found in financial services association Limra International’s US individual annuities first-quarter 2009 sales report, which showed that fixed annuities outsold stock-market linked variable annuities – $35.6 billion to $30.7 billion.
Fixed annuities last outsold variable annuities in 1995, said Joe Montminy, research director for Limra’s annuity research, in a statement.
“Consumers, still leery of the volatile stock market and looking for secure, competitive guaranteed rates of return, continued to invest more money into fixed annuities for their retirement income needs,” Montminy said.
Having poured resources into the variable annuity side for years, US insurers now are dealing with the reality of an equity bear market and investors drawn toward more conservative, more traditional annuities. For those in retirement, this means fixed deferred or immediate annuity products.
Fixed immediate annuity sales are soaring because people want secure income – and that should continue as long as uncertainty clouds the US equities market – and that clearly could be years away from resolving itself.
With guaranteed payout rates of more than 8 percent for fixed annuities and 5 percent for variable annuities, respectively, the reversal is not a mystery.
Registered representatives get attractive compensation for selling fixed annuities, and in an era in which so many of them are badly in need of some extra revenue and with revenue from fees on assets way down, it is a strong sell. Immediate fixed annuities pay a standard 4 percent upfront commission.
The average middle-income individual, who is at least 65 years old, has lost a lot of money in their retirement account, and likely is looking for ways to put money into annuities for guaranteed income to cover basic expenses such as food and shelter.
Meanwhile, affluent individuals are turning to immediate fixed annuities as a proxy for bonds. Immediate fixed annuities provide higher income than bonds with less volatility.
About 15 percent of immediate fixed annuity sales and over 25 percent of deferred fixed annuity sales come from the broker-dealer network, according to Beacon Research. The most popular terms for fixed annuities are 3, 5 or 10 years, Beacon said. The payout rates on these annuities are 5 percent or more.
Another form of the product set – the fixed rate annuity with market value adjustments – also is growing more popular, particularly in the broker-dealer channel. These products pay higher rates of interest, but clients assume more interest rate risk if they withdraw during the surrender charge period.
The value of the client’s principal is based on the change in a stated interest rate benchmark, such as Treasuries, since the contract was issued.
If rates are higher when the client withdraws, the account value declines, based on the formula. If rates are lower, the account value is greater.
The secret to the popularity of fixed annuities is no secret at all – it is the perfect product for a retirement sector worried about outliving their money.
Unlike variable annuities, which pay an income that rises and falls based on the value of mutual funds, a fixed annuity is a contract in which an insurance company makes a consistent payment to the investor until he or she dies. The insurance company guarantees both the earnings and the principal.
Insurers are willing to assume the risk because they plan to invest the annuity premium in long-term government securities, stocks and corporate bonds that yield a higher rate of return, making a profit on the spread.
Most US financial planners use a general rule of thumb of 4 percent for estimating how much of a retirement nest egg can be safely withdrawn each year. Any amount higher could put an investor at risk of outliving the money saved.
Fixed rate annuities help to eliminate that worry. Typically, a 60-year-old person who purchases a fixed annuity can get a lifetime guarantee of about 5 percent of the amount invested on an annual basis. A 70-year-old person could get about 6.5 percent a year.
Fixed rate annuities should continue to grow, particularly in the bank channel. Fixed annuities should have an ongoing competitive advantage due to a positive yield curve (long-term interest rates higher than short term interest rates) and a wide spread of corporate bond yields over Treasury bonds. Low inflation will help keep these rates attractive.
Also, healthy growth in immediate annuity sales should be expected, even though payouts are down and many in the US are postponing retirement. Those reliable monthly cheques will continue to look good relative to alternatives such as living on systematic withdrawals from depleted assets or on interest in the current low rate environment.
So long as the US investor wants to keep a toe in the water of the financial services industry, those who understand how to take advantage of the public’s demand for conservative investments are going to have a great year and a bright future as well.