In a sign that bank customers are accepting higher risk in exchange for fatter returns, variable annuities sold through banks are poised to overtake fixed annuities in popularity.
As recently as 1995, bank customers invested more than three times as much in fixed annuities as in their variable-rate counterparts.
But variables have almost closed the gap.
In the first quarter of 1997 investors poured $2.2 billion into them, compared with $2.6 billion for fixed annuities, according to insurance consultant Kenneth Kehrer, principal at Kenneth Kehrer Associates, Princeton, N.J.
Unless the stock market tanks or fixed annuities' yields suddenly skyrocket, variables will surpass fixed annuities in terms of the amount of money invested this year, said Mr. Kehrer. The biggest reason for the reversal seems to be the strength of the stock market, which is generating returns far higher than those of fixed annuities.
"With the strength of the market, it gets people more confident," said Jim Heide, annuity products manager at KeyCorp, Cleveland. "And you haven't seen a major correction to scare them (stock investors) back into their hole."
Over the last two years, 70% of KeyCorp's $600 million in annuity sales has been in variables.
Fixed annuities are contracts sold by life insurance companies that guarantee a certain payout at regular installments. Variable annuity payouts, by contrast, depend on the success of the underlying investment.
As variable annuities have grown, fixed annuities have trailed off. They slid from $14.7 billion in premiums in 1994 to $10.7 billion in 1995 and $10.3 billion last year, according to Kehrer Associates.
Joseph Tumbler, vice chairman for SunAmerica Inc., a big seller of annuities through banks, said the numbers explain why.
Fixed-rate annuities might return 6%, compared with as much as 20% to 35% for variables, he said.
The boom in variables is a logical extension of the surge in mutual funds, combined with demographic realities, said Mr. Kehrer.
Aging baby boomers are planning for retirement, and they are worried that their Social Security won't support them. Variable annuities offer them, in essence, tax-deferred mutual funds for their golden years.
"All the talk of baby boomers is a mutual fund story," said Mr. Kehrer. "Variable annuities are just riding that wave."
Variables overtook fixed annuities in the general market in 1993, but the trend has been slower to catch on at banks because, experts say, bank customers are more conservative and less sophisticated than those who invest through other channels.
But bank customers are getting more savvy about financial products, said Mr. Kehrer: Sales of mutual funds through banks took off in 1993 and variable annuities have followed.
Not all banks, however, are seeing the variable annuity surge.
J. Edward Diamond, president of Dime Securities, New York, said his business still runs four-to-one in favor of fixed annuities.
Of his bank's $270 million in annuity sales last year, just $50 million or $60 million was in variable annuities, he said. The trend has continued this year.
"It may be in part because of our savings bank heritage," he said. "I'm amazed the two are coming together in the bank channel."
