Bank Annuity Sales Collapse to 10-Year Low

Continued poor rate spreads between CDs and annuity yields pushed bank-sold annuity sales last year to their lowest level since 2000 and off more than 25% from what was widely viewed as a lackluster 2009.

Kehrer-LIMRA this week reports that total annuity sales through banks fell to $33.2 billion in 2010—a trough unseen since banks sold $31 billion in annuities in 2000.

"The year on the whole wasn't great, obviously," said Scott Stathis, Kehrer-LIMRA's managing director. "You have had minimal rate spread between and CDs and annuities in the past year. It used to be historically you'd have a spread of 150 basis points or more. We haven't seen 150 basis points in years."

"Now people get excited if it gets to more than 20 basis points," he added.

The bad news for financial institutions -- and particularly banks which tend to attract the most conservative investors -- could have been much worse had it not been for a decent recovery in variable annuity sales as investors were encouraged by the recent strong performance of U.S. equities.

Still, the poor rate spreads remain a serious obstacle to banks, broker-dealers and financial advisors recommending annuities of any type to investors.

Stathis said as of March 15, the average five-year CD was delivering a 1.71%, FDIC-secured return while average effective yield of fixed annuity was only 2.04%. That's not much, he said, but it's certainly better than the largely nominal and occasionally negative rate spread between the two that occurred for several months of 2010.

"Also, you now have market-linked CDs being sold by banks and we're still not sure how much that's going to cut into fixed annuity sales," Stathis said.

In 2010, total fixed annuity sales fell to $16.9 billion and the share of fixed annuities sold through banks plunged to 22.5%—nearly half of the all-time high share of 40.1% set in 2001. And, according to Jennifer Parmelee Witt, an associate research director at Kehrer-LIMRA, banks' share of total fixed annuity sales declined to 15.4%, their lowest share since 1998.

However, banks sold more than $16.3 billion in variable annuities last year, up 29% from 2009 but still way below the $25.2 billion in variable annuity sales recorded in 2007. Banks accounted for 11.6% of all variable annuity sales last year, up from 10% in 2009.

"While it was heartening to see growth for variable annuities, demand is fragile and it will take time, a strong stock market, and renewed investor confidence before we see sustained growth," Witt said in the report.

This story has been reprinted with permission from Financial Planning.