‘More Attention’ for Indexed Annuities In Low Rate Environment
Feature Article - Summer 2012 | By Andrew Singer
FIXED INDEXED ANNUITIES (FIAs) “are here to stay,” says Kris Kattmann, vice president, fixed annuity business-line leader, Lincoln Financial Group (Greensboro, NC).
Bank customers, like most investors these days, have to find somewhere to invest their money. The yield on 10-year T-bills was still below 150 basis points in late July. ”Who thought that would ever happen?” asks Kattmann. That doesn’t leave a lot of safe investment areas where one can earn a decent return.
It’s not surprising, then, that an FIA that credits 165 basis points is one of Lincoln’s best-selling products these days. The company continues to experience “healthy sales in the bank channel,” adds Kattmann.
Industrywide, banks increased both nominal sales of FIAs as well as market share in 2011, according to Jeremy Alexander, CEO, Beacon Research (Chicago). Bank market share was 6.4 percent in 2010. It rose to 7.4 percent in 2011, according to Alexander.
At CUNA Mutual Life Insurance Company (Waverly, IA), which distributes mostly through credit unions, 2011 was a very strong year for indexed annuities, says Bob Buckingham, vice president, product executive—annuities. The low interest rate environment presents enormous obstacles for traditional fixed annuities, the bread and butter of most retail bank investment programs.
There was a bit of weakening in FIAs in the first half of 2012, says Buckingham, particularly as yields came down, but the sales decline was not dramatic.
“There is some hesitation on the consumer’s part,” explains Buckingham. “They’re not sure where to go, not sure where to put their money—afraid to commit.”
Growth over the past decade has been significant. In 2003, there were basically no fixed indexed annuities sold through the bank channel, according to Alexander. In 2011, by comparison, bank channel sales were close to $2 billion. The product has been “getting traction” in banks.
FIAs have been getting more attention in banks, agrees Chad Tope, president, Annuity and Asset Sales Distribution, ING U.S. (Des Moines, IA), although the product “got beat up quite a bit” in recent years, particularly with the 151A flap.
If interest rates rise, ‘We will definitely see more sales,’ but how much depends on how well banks educate their advisors and clients. — Chad Tope, ING U.S.
(SEC Rule 151A sought to reclassify fixed indexed annuities as securities rather than insurance products; the rule was vacated by the U.S. Court of Appeals in 2010.)
Moreover, 2011 “was a tough year” for FIAs, says Tope. One reason was market-linked certificates of deposit (MLCDs), which “took a little bit of wind out of our sails,” he admits. Market share fell some, “but we’re starting to get that back now.”
The low interest rate environment has made sales more difficult. FIAs come with a lot of inherent guarantees. As rates sink, those guarantees cost a carrier the same as before, but the amount they can pay for options gets smaller, so the caps come down—from 5 percent, say, to 3 percent. Advisors begin to say, “I’ll wait until caps go back up.”
Fewer, simpler products
Indexed annuities have drawn some criticism in the press—for their “huge” surrender charges and their opacity when it comes to crediting rates, among other reasons. Many banks have countered by selling simpler products with shorter surrender-charge schedules.
Surrender charges “have not been an issue” for CUNA Mutual, says Buckingham. “We weren’t an early adopter, and we distribute mostly through credit unions, so we designed it to be very simple and straightforward, targeted to registered advisors.”
While in the independent brokerage channel, Lincoln Financial may sell FIAs with 14-year surrender-charge periods, starting at 14 percent; in banks surrender-charge periods almost never surpass 10 years, starting at 10 percent. In fact, Lincoln’s more popular bank channel products have six- or eight-year surrender-charge schedules, says Kattmann.
Fixed indexed annuities ‘are here to stay.’ They continue to experience ‘healthy sales in the bank channel.’ —Kris Kattmann, Lincoln Financial
Banks often have product review committees that push them toward distributing fewer, less complex investment products. These committees tend to say: “We’ll let this one in, not that one,” notes Kattmann.
Thus, banks may have only two, three or four fixed annuity products on the shelf, which in some ways is an advantage—it makes it easier to close a sale in some circumstances, suggests Kattmann.
Lincoln’s most popular FIA in the bank channel is particularly simple. It has a “performance trigger.” If the S&P 500 gains anything at all (or is even level) after one year, the holder gets a specified rate (e.g., 2.5 percent). Only if the S&P declines does the holder receive no return. This is an annual point-to-point product. In other distribution channels, FIA products are more complex—they may have monthly point-to-point calculations, for instance.
ING sells five-year and seven-year FIAs in the bank market, not the 10-year product sold more in some of its other distribution channels, notes Tope. The shorter duration FIAs are more in line with traditional fixed annuity surrender-charge schedules.
“Generally speaking, FIA sales in banks are driven by short durations (five to seven years) and simple crediting methods (annual point-to-point, performance trigger),” notes Randy Gabrielson, senior vice president, head of financial institutions and investment partner relations for Allianz Life. “The best-selling FIAs through the bank channel typically offer multi-year guarantees on the cap and fixed account rates as well, but it’s not required to be successful. In 2010, Allianz Life launched the Allianz Pro V1 FIA, a five-year duration product that has proven to be popular in the bank channel.”
If interest rates rise
What happens if interest rates rise? Would that knock the wind out of the sails of indexed annuities? On the contrary, it would help FIAs, in Buckingham’s view, mainly because caps have been pushed down so low—they are now in the 3.5 percent range—“which removes some of the attraction.” Caps in the 7 percent to 8 percent range “would help.”
ING has developed an FIA investment strategy based on rising interest rates. (The client is, in effect, betting that interest rates will rise.) The ING Interest Rate Benchmark Strategy bases interest credits on an increase, if any, during the contract year in the 3-Month LIBOR Interest Rate multiplied by a predetermined factor. That increase can rise up to a stated cap, with a floor of zero crediting should rates fall or remain the same.
Launched in July/August 2011, the new product has been “doing very well,” says Tope, and now accounts for 30 percent of ING’s FIA sales. “The strategy is resonating” in banks, too, though it requires some education on the part of both reps and investors.
If interest rates do rise, “we will definitely see more sales,” but how much depends on how well banks educate their advisors and clients, adds Tope.
It’s likely, however, that interest rates will stay low through 2012 and at least part of 2013, in his view. At that point, one wouldn’t have to see too much interest rate movement before bank sales of FIAs surged, Tope anticipates—perhaps 20 percent growth or more if, say, 10-year Treasuries were to rise 100 basis points.
Alternatively, could interest rates rise too much for FIAs—driving investors back to traditional fixed annuities? Maybe, answers Alexander. “Everything in the investment world hinges on interest rates” now, he says. But he doesn’t see nominal sales or market share dropping drastically. For one thing, there is so little FIA penetration in banks that indexed annuities may continue to gain even if interest rates rise substantially.
What are the primary obstacles to more FIA sales in the bank channel? In the present low interest rate environment, “It’s not appealing to invest for any length of time at 165 (basis points),” notes Kattmann. People say to themselves, “Rates could (or should) go up.”
But people can take a look at other FIA features, like income riders, in which you use assets to generate income, notes Kattmann. While the policy growth of the Lincoln New Directions Fixed Indexed is 1.65 percent, or something on that order, a much higher portion can be withdrawn: “10% of your contract value is available to you each contract year during the surrender charge period, without incurring charges,” notes the company.
In 2003, there was basically no indexed annuity activity in the bank channel. In 2011, bank channel sales were close to $2 billion. The product is ‘getting traction.’ — Jeremy Alexander, Beacon Research
This product is now available in banks where there have been “pockets of interest.” More bank reps understand it and are using it, says Kattmann.
Guaranteed withdrawal benefits have indeed become more prevalent in the fixed indexed annuity world, Buckingham agrees, although that’s a feature CUNA Mutual has shied away from in an effort to keep the product simple. SPIAs (single premium immediate annuities) are really better for income purposes, in his view; the FIA is more of an accumulation vehicle. Still, given the increasing prevalence of withdrawal benefits, he’s keeping an eye on things.
Regarding living benefits, “We as an industry have to be careful,” adds Tope. “We saw what happened with variable annuities.” (Some carriers made pricey promises to customers.) Income riders tend to ‘draw a line in the sand.’ If the policyholder doesn’t make it to the line, then he or she had paid for a benefit without value.
At ING, if a consumer dies with even $1 left, “We refund the rider charges.” If the policyholder makes it to the red line—gets into the insurance company’s money—then they have received value from the rider.
Even when banks offer a living benefit, “they typically have lower election rates than you might see with products sold through independent agents,” notes Gabrielson. “The reason is primarily because banks do not have as much experience with FIAs as independent agents, and therefore tend to sell FIAs with the idea they will move the money out after the surrender period is up. That being said, banks are increasingly seeing the value in GLWBs [Guaranteed Lifetime Withdrawal Benefits], and we expect election rates to these benefits will go up over time.”
Many bank-sold indexed annuities still do not have living benefits, notes Alexander. By comparison, most of those sold in the independent brokerage channel, the product’s largest distribution channel, have GLWBs.
‘Banks are increasingly seeing the value in GLWBs, and we expect election rates to these benefits will go up over time.’
All this leads Alexander to conclude that FIAs are sold in banks mainly because of their downside protection (guarantee of principal as long as the product is held) and the cap rate. A cap rate of 3 percent might not look so great, but it is surely better than the 1.5 percent an investor might get with a traditional fixed annuity.
Because most bank-sold indexed annuities do not have GLWBs, if interest rates rise, bank customers might shift again to traditional fixed annuities, suggests Alexander. That 3 percent cap rate doesn’t stack up so well if and when traditional fixed annuities are paying 4 percent to 5 percent.
“Banks realize this,” adds Gabrielson, “and this is one of the main reasons that they prefer shorter durations.” It’s not accurate to say that bank-sold FIAs don’t have GLWBs, however, he says. “Several have them, and as more people understand the need for guaranteed lifetime income in retirement, these benefits will be increasingly attractive.”
Over the short term?
Over the next 12 months, interest rates are likely to stay low, in Buckingham’s view—the Fed has said as much—so he expects more of the same with regard to FIAs. That is, they should continue to sell well in banks and credit unions, but he wouldn’t expect sales to skyrocket. They should perform better in this environment than traditional fixed annuities, however.
Both clients and advisors believe that “rates have got to go up,” but there is no guarantee that will happen, adds Buckingham. If and when low interest rates become the “new normal,” clients will come off the investing sidelines, he speculates. “Indexed annuities will become more attractive.”
It’s a good product for the conservative credit union member because there is no risk to principal (assuming they hold the product). As bank advisors get to know FIAs, they tend to really like them, too, he says.
Others see promise. American National Insurance Company (Galveston, TX) will be introducing a new fixed indexed annuity with a lifetime income rider in the fourth quarter of 2012 or the first quarter of 2013, ANICO EVP David Behrens told us. “The timing is good now.”
That said, “We still have a lot of education to do. There’s still a lot of baggage that comes with the product,” says ING’s Tope.
The product has been sold in banks mostly by registered reps, with LBEs tending to refer sales prospects to the Series 7 reps. Many carriers thought originally LBEs would sell the product because it doesn’t require SEC registration, but that doesn’t seem to be the case in most banks.
There are exceptions. “Allianz Life has seen success with both Series 7 financial advisors and LBEs,” says Gabrielson, but they have seen more activity with Series 7 advisors because not all banks have LBE programs in place. “Our experience shows approximately 65 percent of our tickets come from securities-licensed advisors.”
Could FIAs ever rival traditional fixed annuities in the bank channel? If interest rates stay very low and if the equity markets find strength and stability, “then it could rival traditional fixed annuities,” opines Buckingham.
It’s probably not right to view traditional fixed annuities and FIAs in either/or terms, though. If interest rates increase, “all ships would rise,” in Buckingham’s view—that is, both products would fare better.
If it happens at all (FIAs surpassing fixed annuities in banks), it will take time because there are so many traditional fixed annuity assets on the books, says Kattmann.
“As people live longer and longer, they need to generate income,” she adds. This means they will be focusing on ways to get better returns. Once they retire, they don’t really have the time to get over equity market losses. But they still may have many years to live, so they also can’t afford to lock up money at 165 basis points.
With an indexed annuity, the worst that happens is you get zero, notes Kattmann. Think back to 2008-2009. If you could have gotten zero in the equity markets, you would have been “ecstatic.” In 2010, one of Lincoln’s FIAs paid off 43 percent. (No banks were selling that product at the time.) “Maybe I could have gotten more (then 43 percent) in equities,” says Kattmann, “but do I care?”
“Over time,” says Kattmann, “indexed annuities will gain ground and could surpass (traditional) fixed annuities in volume.”
Andrew Singer is editor-in-chief and publisher of Bank Insurance & Securities Marketing magazine. He can be reached at firstname.lastname@example.org