(FREE) American investors are not ready to flee the investment
market entirely, if sales of fixed annuities are any
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
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
“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
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
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.