Lincoln National Corp. reported a slight decrease in fourth-quarter fixed annuity sales at the end of a tough year for the product line.
The Philadelphia insurance company sold $222 million of fixed annuities through banks in the quarter, down 5% from the year earlier, according to Kenneth Kehrer Associates, the Princeton, N.J., consulting firm that tracks annuity sales through banks.
For the full year, its fixed annuity sales were $861 million, down from $1.236 billion, or about 30%.
Lincoln sells very few variable annuities through banks, according to Kenneth Kehrer, the consulting firm's president. The company only sold about $18 million of the variable product last year, including less than $1 million in the third quarter. It is just not a product the company has focused on selling in the bank channel, Mr. Kehrer said.
And Lincoln was not alone in seeing fixed annuity sales decline. "In 2003 a lot of companies had declines," Mr. Kehrer said, in part due to low market interest rates. He said that he has data for all but one insurer, Sun Life Financial of Canada, and many companies' fixed annuity sales fell 25% to 45%.
Lincoln's overall results were strong. The company reported net income for the quarter of $194.3 million, up 281% from the year earlier. For the full year, net income was $511.9 million, compared with $48.8 million in 2002.
The company did not return calls asking to discuss its bank sales.
Mr. Kehrer said that because of the way annuities are sold bad sales years can actually look good in terms of income. Since companies pay out a big commission in the year they sell an annuity, profitability is depressed, he said. Years when fewer annuities are sold can appear stronger at the bottom line.
"I think a lot of companies in 2003 were challenged in the fixed annuity line as interest rates had come down," said Joel Levine, an analyst at Moody's Investors Service in New York. "They found that a lot of their products were less profitable."
At the same time, he said, companies like Lincoln have been pretty aggressive in managing their interest spreads, which has kept the products profitable.
The big concern for 2004 would be an interest rate decline, Mr. Levine said, but "most capital markets participants would probably be more concerned about rates rising over the next six months or so," not falling.
At the same time, variable annuities are "kicking into gear" at a variety of companies, including Lincoln, Mr. Levine said. Though Lincoln does not sell a lot of the variable product through banks, it does have good sales through other channels.
Though the strengthening equity markets suggest a rebound is likely for variable annuities, Carmen Effron, the president of the CF Effron Co. consulting firm in Westport, Conn., said, "there is still a market for fixed annuities."
People in their retirement years who need the stability of income guarantees are still good candidates for fixed annuities, she said, even at low interest rates.
Insurers need to develop products that not only give customers the expected growth but also sustain a level of profitability, she said.
"The fact of the matter is, they can't create an interest rate that doesn't exist," Ms. Effron said. "There's no way they can create a product that doesn't make economic sense for the insurance company to actually sell."
However, by offering creative products that tie returns to indexes or allow room for yield growth over time insurers can maintain a healthy interest in fixed annuities, she said. By being creative, insurers can create products that appeal to consumers and that banks want to sell, she said.
But ultimately bank sales depend on what is the best investment for each individual, Ms. Effron said.
"Bank reps don't want to be stuck into selling something that doesn't make sense for the client," she said. "If the variable annuity or the universal life product makes more sense, then they really have to sell what makes sense."
