New York — Difficult market conditions have hammered variable annuities, but fixed annuities have held their own as investors have looked for products with a guaranteed return, industry analysts say.

Assets held in fixed annuities increased 1% during the third quarter, to $66.4 billion as of Sept. 30, 2008, according to LIMRA International Inc. 

"Producers and consumers are taking a closer look at guaranteed investments like fixed annuities," says Scott Kallenbach, an associate project director of strategic research for the trade group. "It is clear from the third-quarter sales that while variable annuity sales are way down, fixed remain very strong."

Banks remain an important channel for annuity distribution. According to LIMRA, they led all distribution channels with $38.5 billion of third-quarter sales, or 19.5% of the industry total. During the quarter 60.2% of annuities sold through banks were fixed.

Kallenbach says producers, including insurance agents and brokers, remain bullish about insurance products, especially fixed annuities and fixed index annuities.

According to a LIMRA survey of 1,000 producers conducted last month and released Monday, 82% say that they will increase fixed annuity sales this month and next year.

Carmen Effron, who heads C.F. Effron Co. LLC, a consulting firm in Weston, Conn., says investors are interested in safe products like certificates of deposits and fixed annuities.

"There just aren't a lot of adventurous investors out there right now," she says. "People that have money want a guarantee."

Most investors continue to invest in mutual funds through 401(k) plans and health savings accounts, and wealthy investors are buying Treasuries "because rates are so low," but investors who do not have $25,000 to put in Treasuries "want a safe alternative with a guarantee," Effron says. "They want to invest with insurance companies with good names, good brands, and consistent performance."

According to LIMRA's data, producers remain positive about sales next year. Kallenbach said he was surprised by how optimistic they were about this year and next year. In the survey, 45% of producers said their sales were good or excellent this year, and 80% said sales were flat or better. Half of the producers expect strong sales next year.

Kallenbach says it is critical for advisers to speak with their customers and persuade them to "stay the course." In the survey, 90% of advisers said they had reached out to clients as a result of the financial crisis.

The market turmoil has created an opportunity for advisers to "show their worth and prove their value" to investors, he says. "By being proactive, advisers can show investors how they can ride out the storm."

In the LIMRA survey, 85% of producers said they have told clients to stay the course, 75% said they are providing clients with information about their company's stability, and 66% said they have advised clients to invest while prices are low.

"Developing and maintaining the relationship is important, and to achieve this, communication is key," Kallenbach says. "Investors don't want information sugarcoated. They want producers to be up front."

Effron says she expects investors to continue putting their money in products sold by well-established insurance companies this year and next year. Kallenbach says the "usual suspects," including MetLife Inc. and Hartford Financial Services Group Inc., continue to lead the way in annuity sales, despite the financial crisis and Hartford's conversion to a bank holding company to gain access to federal funds.

Since LIMR 's survey was conducted before insurers began seeking funds through the Treasury Department's Troubled Asset Relief Program, it did not ask producers what customers thought of this development, Kallenbach says, but he thinks consumers would be encouraged by it.

"This is what insurance carriers should be doing," he says. "This is a good opportunity for them to get their financial house in order, and getting their house in order can only be viewed as a positive thing."

Effron says most investors are confused about why insurance companies are becoming bank holding companies. "There needs to be a lot of education delivered to the average consumer before they really understand what is going on here."

This effort by insurers "will change the face of deposit gathering" for small and midsize banks, she says. "When you have insurance companies and large banks like J.P. Morgan competing against you, that could be difficult to overcome, because these companies can afford to be a lot more aggressive."

Fixed annuities will remain popular for individual investors until markets stabilize, and that will not happen until "investors see positive indicators surrounding mortgages and the credit markets," Effron says.

"People will continue to nibble, and we will have rallies, but markets are going to seesaw for a while," she says. "Investors are nervous. There are going to be rallies and pullbacks, and most investors are going to want guarantees until this get a little more stable."

Kallenbach says: "Fixed products continue to resonate with investors. As long as markets remain volatile, investors are going to seek the safety of fixed and guaranteed products."

Source: American Banker

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