Fixed annuity base rates slipped below a bank CD rate average this month for the first time in at least a decade, and the annuity product's sales through banks are seen as slumping in response.
The Kehrer-Jackson National RateWatch for July showed the average base crediting rate on fixed annuities was 2.69% as average one-year CD rates reached 2.82% after a steady climb that began in May 2004. The convergence of the two rate trends has kept banks' fixed annuity sales below $2 billion a month for most of this year, according to another survey by Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks the sales.
Index annuities "have cushioned the fall of overall fixed annuities," however, said Kenneth Kehrer, the consulting firm's president. His firm has monitored rates since 1995, he said, and CD rates had never topped the base rate for fixed annuities in the survey.
Demand for variable and index annuities has grown as investors seek higher returns in an environment of declining long-term rates, according to Mr. Kehrer. Index annuities, a type of fixed annuity, let investors participate in the stock market's upside potential by investing a portion of the premium in bonds and another portion in an option on a stock market index such as the Standard & Poor's 500.
A third Kehrer survey, released early this month, said banks had sold $300 million of index annuities in the first quarter, up 79% from the year earlier, but still a small share of the roughly $5.6 billion of fixed annuities sold in the channel during the quarter.
"It looks like it's going to continue," Mr. Kehrer said of the downward movement of fixed annuity crediting rates. The Federal Reserve has signaled an intention to keep raising short-term rates, which affect CDs, while the long-term bond rates that underlie fixed annuities have generally remained level, he said.
Citizens Bank in Providence, R.I., says demand for its certificates of deposit has risen in recent months and fixed annuity sales have correspondingly declined.
David Stebenne, a vice president and the director of insurance at the bank's CCO Investment Services, said the shift in investor appetite for fixed annuities and CDs has not changed the way the Royal Bank of Scotland subsidiary markets these products, however.
Banks have seen traditional fixed annuity sales taper off in the past two years, said Bradley Powell, the president of the institutional markets group at Jackson National Life, a co-sponsor of the rate survey. "Banks and bank representatives are not selling fixed-income annuities to the extent they were a year or two ago," he said.
Traditional fixed annuity sales at the U.S. unit of Prudential PLC, the British insurer, totaled about $768 million in the first half of this year, or 27% less than a year earlier. But its sales of index annuities were $555 million, up 93%.
The traditional product will still generate interest from investors who want a dependable income stream and a guaranteed minimum return, however, Mr. Powell said. "They're still the right investment for the right people," he added. "Interest rates are not the primary driver of fixed annuity sales."
"Traditional fixed annuities are valued for reasons that go beyond the interest rate payments," said Mark Heitz, the president of AmerUs Annuity Group in Topeka, Kan.
AmerUs Group, a Des Moines insurer and annuity provider, said it has seen a 67% rise in fixed annuity sales this year, to $713 million in the second quarter, from $427 million the year earlier. But most of the upswing can be attributed to demand for index annuities, which comprised 90% of the company's fixed annuity sales, Mr. Heitz said.
Investors who are looking for a steady stream of income and a shield against market risks will still find traditional fixed annuities attractive, he said, adding that retirees in particular value the fixed product for its regular payouts and tax-deferral features.
