Despite Low Interest Rates, Indexed Annuities Jump
November 23, 2010 by Fran Matso Lysiak
| Copyright: | (c) 2010 A.M. Best Company, Inc. |
| Source: | A.M. Best Company, Inc. |
| Wordcount: | 615 |
Despite low interest rates, total third-quarter U.S. sales of equity-indexed annuities were $8.7 billion, an increase of 16% from the same period a year ago, according to AnnuitySpecs.com, a firm that tracks the data.
Even with a very low interest-rate environment in which credited rates didn’t look attractive, indexed-annuity companies “hit record sales” in the quarter, Sheryl J. Moore, president and chief executive officer of AnnuitySpecs.com, told BestWire. The average rate on a fixed annuity was just 3.14% while the “average cap” on an indexed annuity was just more than 4%, she said.
“Consumers are saying, ‘I want a product that is going to protect my principal and still give me the opportunity to what I can get at the bank,’ ” Moore said.
With these retirement savings and income products, an insurance company invests most of the principal in bonds to ensure the policy will generate a small annual return but the insurer uses a small portion of the premium to buy options in a stock market index, primarily the S&P 500 index. 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.
Allianz Life Insurance Company of North America, a unit of Germany’sAllianz SE, maintained its No. 1 rank, with sales of $1.9 billion and a 21.7% market share, according to AnnuitySpecs.com.
Maintaining second place was Aviva USA, a unit of U.K.-based Aviva plc, with sales of nearly $1.4 billion; American Equity Investment Life kept the No. 3 spot, with sales of $1 billion, while Lincoln National Life maintained fourth place, with sales of $852.9 million.
Lincoln was noteworthy as its sales jumped 63% from the prior quarter, Moore said. Many of its indexed annuities were being marketed as fixed, she said. The company distributes annuities heavily in banks and its rates on fixed were very competitive versus bank products, such as certificates of deposit, Moore said.
Rounding out the top five was ING, with sales of $486 million, according to AnnuitySpecs.com. It knocked off North American Company for Life and Health Insurance, a member of Sammons Financial Group, which captured fifth place in the second quarter (BestWire, Aug. 17, 2010).
Indexed annuities have grown to represent 41% of the fixed-annuity market, according to Joseph Montminy, assistant vice president for annuity research at LIMRA, which separately releases annuity sales data.
“This is the ideal market for indexed annuity sales: lots of volatility in the equities markets coupled with low credited rates and declining interest rate spreads on traditional fixed-rate annuities,” Montminy said in a statement.
In December 2008, the U.S. Securities & Exchange Commission had voted to reclassify indexed annuities as securities, not insurance products. But this past summer, the U.S. Court of Appeals for the District of Columbia Circuit ordered that SEC’s Rule 151 A — to regulate indexed annuities as securities — be vacated (BestWire, July 13, 2010).
Soon after, the SEC was to be barred from regulating them under an amendment included at the last minute within Congress’s financial services regulatory reform bill (BestWire, July 20, 2010).
The fixed insurance status of indexed annuities has been secured, said Moore. Since then, many more insurers are now looking into developing these products, she said.
Meanwhile, Moore wants to ban the use of the word “equity” in the product’s name. “My petition is primarily a move to help prove to the press that that is not an appropriate reference.”
Indexed annuities are linked to a stock-market index, Moore said, but companies limit the credited interest through the cap participation rate so the insurer can afford the minimum guarantee.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
