Banks have happily watched their annuities sales rise in recent years. But a report from Sanford C. Bernstein & Co., a New York-based money management firm, is bad news for annuities marketers, including those who have prospered at banks.
The almost perfect confluence of demographic trends, interest rate spreads, and tax advantages that has nourished annuity sales may be ending, said Sallie L. Krawcheck, research analyst at Bernstein.
The first indicator of trouble may well be what is happening to sales in bank branches.
In recent years, annuity sales industrywide have been boosted by rising bank sales, said Kenneth Kehrer, a consultant in Princeton, N.J. But the growth of the bank share comes from more branches selling annuities, not more sales per branch, he said.
Though numbers are hard to come by, anecdotal evidence indicates that per-branch sales may be stalling.
"What we've experienced in the last two years is a pause or dip in overall production," said John S. de Grauuw, senior vice president for retail investment services at Premier Bank, which has $5.5 billion in assets and 150 branches in Louisiana.
Underwriters of bank annuities have also noticed a change.
"Our same-store sales are probably down, but we're more than offsetting that by adding some major accounts," said Bruce R. Abrams, senior vice president for financial Institutions marketing, Western National Life, Houston.
The insurer sells annuity products through about 4,000 branches of 150 banks across the country. By yearend, Mr. Abrams said, he expects relationships with 15 more banks to swell the branch total to 6,000.
Mr. De Grauuw of Premier says his bank may be feeling a slowdown earlier than some others because its eight-year-old annuity sales effort has already reached many of the target customers.
"We've penetrated our market to a high proportion," he said. He declined to provide a figure but said it is "higher than the industry average."
Bank sales of fixed-rate annuities last year equaled 1.3% of retail deposits, and variable annuities just 0.1%, according to Kenneth Kehrer Associates.
At the 627-branch NDB Bank, Detroit, annuity sales are "essentially flat to down a little bit from 1994 to 1995," said Russ C. Browne, first vice president of retail investments and insurance.
He said the shrinkage in the spread between long-term and short-term interest rates has dampened customer enthusiasm for fixed-rate annuities.
"There's little incentive to tie money up for a long time in alternatives to a CD" when the rates are only 1% better for an annuity, he explained.
Another reason for the sales slump may be saturation of the 62-and-older market, he said.
Like many bankers, Mr. Browne is wrestling with how to sell annuities to customers who do most of their banking by ATM and telephone. "The people who aren't coming into the branches are under age 50," he said.
Data from Bernstein and others show that the annuity sales sweet spot remains the relatively affluent customer approaching retirement.
Two big demographic factors underlying static sales are that many of the typical annuity buyers have already been tapped and the baby-boomer bubble won't enter prime buying time for at least five to 10 years.
Many bank and insurance executives have said boomers are the source of hope for future annuity sales. But the Bernstein report, "The Annuity Market: The Slowing of a Most Excellent Adventure," says boomers won't ride to the rescue anytime soon.
"It's not the baby boomers who are walking into their bank branch and buying this product," said Ms. Krawcheck, the report's author, during a recent interview in New York. "It's their parents who are doing it."
To put a finer point on it, she added, "It's not the people who are saving for retirement. It's people who by and large are already retired - 62-year-olds" and older.
That doesn't mean there's no room for sales growth.
"The numbers you hear thrown around are that 4% to 5% of U.S. households own annuities," Ms. Krawcheck said. "But the people who have the bucks to buy annuities are 30% to 40% penetrated.
"There's an opportunity still there; it's just not what had been thought."
Some bankers say the current flattening of the yield curve is a temporary phenomenon - that the curve will steepen to its historical norm, restoring annuity sales.
"You might see a short-term pause or blip on the radar screen along the way," Mr. de Grauuw said. But the upward trend - especially through the bank distribution channel - is inexorable, he said.
Annuities, Mr. de Grauuw said, are an important source of fee income and a competitive necessity in the financial services marketplace.
"Banks are in the business to stay," he said.
