Market turmoil and rising interest rates might kick off a new season for the fixed annuity as the product emerges from the shadow of its variable cousin, an industry expert said.
"If you look analytically at market conditions, you find the variable annuity has a bit of difficulty heading into an uncertain market, even with long-term guarantees," said Noel Abkemeier, consulting actuary and principal at Milliman Inc., a Seattle-based research firm. "Strange things are happening, and if interest rates pick up, it can strengthen fixed-rate and equity-indexed annuities."
Variable annuity sales in the first quarter hit $41.6 billion, up 1.7% from the previous year, according to Reston, Va.-based National Association for Variable Annuities Inc.
Fixed-annuity sales, on the other hand, leaped by a dramatic 35% in the first quarter, hitting an estimated $18.1 billion, according to Evanston, Ill.-based Beacon Research Publications Inc.'s quarterly Fixed Annuity Premium study.
The two annuity groups don't directly compete with each other for the same audience, because products are recommended based on an individual customer's needs, not the stock market's gyrations.
However, certain market conditions will make one product seem more or less appealing than the other. For instance, when interest rates are low and the yield curve is flat, individuals lose interest in fixed annuities, Mr. Abkemeier said. When the equity markets are riding high, consumers will look at variable products.
The markets may be on the side of the fixed products right now, as investors who are weary of market turbulence search for consistency, industry observers said.
"We're seeing advisers excel when they have decided on having a stable, honest return," said Jack Mishler, divisional vice president for the Western region in Lansing, Mich.-based Jackson National Life Insurance Co.'s institutional marketing group.
"Consumers hear the
Federal Reserve won't raise interest rates, and rates on certificates of deposit are in the mid-twos, which won't keep up with inflation, but they don't want to go to the variable markets," he added. In such cases, a fixed product that earns 5% to 8% over a seven-year period could seem appealing to clients.
Anticipating a rising popularity of fixed annuities, some carriers have brushed up their fixed offerings. For instance, Allianz Life Insurance Company of North America in Minneapolis last week introduced its Allianz Summit II fixed index annuity, which provides customers with positive indexed interest in a negative equity market.
"We're trying to be innovative and expand this concept, so even customers who wouldn't normally look at this product would find it appealing," said Eric Thomas, senior vice president of sales for Allianz's fixed-product line.
Other carriers have attached guaranteed-lifetime-withdrawal benefits to their indexed products to protect clients against low cumulative yields and provide them with longevity insurance, Mr. Abkemeier observed. He also said that insurers could consider attaching a long-term-care benefit if they wanted to propel sales of fixed products.
"Much like the variable side, we've seen a surge of benefits in fixed products," said Chad Tope, Des Moines, Iowa-based senior vice president for fixed-annuity distribution at ING U.S. Financial Services in New York. "You can turn on the income stream and access additional funds without annuitizing, and the funds can continue beyond the life expectancy."
Though mired in a time of unstable equity markets, variable products offer clients much in long-term benefits and are expected to continue doing well.
CONSERVATIVE ALLOCATION
In order to contend with market difficulties, clients and advisers have shifted to a slightly more conservative allocation within VAs: The concentration of total assets in equities fell to 56.1% in the first quarter, down from 60% in the first quarter of 2007, according to data from NAVA. Meanwhile, amounts in the balanced category climbed to 12.1%, from 10.6%, as has the amount in bonds, which meanwhile rose to 9.6%, from 8.2%.
But tough markets aren't necessarily all bad for VA holders.
"To me, now it's a great time to be in a variable annuity with a guarantee, because when the market goes down a lot, it's a good buying opportunity," said Eric Henderson, senior vice president of individual investments at Nationwide Financial Services Inc. in Columbus, Ohio.
Mr. Abkemeier disagrees. "There's some advantage with an indexed annuity where you don't get hurt by the market's valleys. You don't have the bad years taking back what you got in your good years," he said.
Even though the popularity of either product might shift according to the market's motions and the consumer pools might share some overlap, the individual client's goals should be the sole factor in choosing the right annuity, Mr. Abkemeier added.
"The point is that the person selling should evaluate the customer's needs and risk tolerance, then provide the appropriate product for them," he said.
E-mail Darla Mercado at [email protected].
