Banks have reason to be concerned, based on recent sales data, about the annuity products that have been so popular for them.
Last year, banks lost market share as distributors of the products for the first time since 2000, according to data from Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks bank sales of insurance and investment products. Fixed annuity sales fell sharply last year, and variable annuities simply maintained their volume from the previous year.
A reversal of this trend in 2005 seems unlikely, an analyst said, because of the interest rate environment and the sluggish state of the stock market.
“There is certainly the expectation that fixed annuity sales will continue to slide down because of the low interest rates and flat yield curve,” said Kenneth Kehrer, who heads the consulting firm. Certificates of deposit and other fixed-income products have become more attractive, he said, and helped to steal fixed annuities’ thunder.
“And the disappointing stock market and bad publicity [regarding regulatory investigations] could be expected to hurt variable annuity sales,” Mr. Kehrer said, “but those would hurt all channels, not just banks.” This may be little consolation for banks, however. Last year, they had 22% of the annuity market, down from 24% in 2003, according to the Kehrer data.
Banks’ fixed annuity sales slid to 36% of the total market, from 39% in 2003, and their share of variable sales fell half a percentage point, to 13.5%
Banks have enjoyed a dominant market share in fixed annuities, so the brisk decline in the product’s popularity among consumers has hurt them in particular.
The drop-off is extra costly because fixed annuities are quite profitable. The commission on a mutual fund sale can be as low as 3.25% when breakpoints, a kind of volume discount for investing a large amount all at once, are figured in, Mr. Kehrer noted.
Fixed annuity commissions, even allowing for consumer discounts the products’ manufacturers have added in the last couple of years, are still 5% or more.
One reason that annuity sales did not fall further last year was the emergence of a popular new product, equity index annuities, which are touted as combining the best aspects of the fixed and variable products.
And Michael D. White, the president of the bank-insurance consulting firm Michael White Associates in Radnor, Pa., said that mutual funds’ and annuities’ combined sales present a more positive picture.
Mutual fund and annuity fee income among bank holding companies rose 12% last year, he said, to $17.2 billion. But he acknowledged that there is cause for concern. “I think everyone tracks sales performance and does worry about this,” he said of the annuity results.
Regardless of combined income, he said, banks must justify carrying each product on an individual basis. “All products must pay freight [to be] included in a distribution system,” he said.
The fixed annuity slide in particular can not be welcome news to banks because they have trained thousands of platform representatives to sell the products in recent years.
But fixed annuities will not fall completely out of favor, Mr. White said. Too many baby boomers are nearing retirement and looking for products with which to preserve their principal, he said.
And to take up the slack, banks can make sure their platform staffs are trained to make referrals to dedicated investment reps and others who have the products that consumers may now prefer, he added. In addition, banks can have them focus more on term insurance sales, he said.
“Banks have had a few challenges,” acknowledged Bradley Powell, the president of Jackson National Life’s institutional marketing group. But his company was able to buck the fixed annuity trend last year, comparing full-year results with those for 2003.
Its sales of traditional fixed annuities grew 15%, to $1.2 billion, though variable sales fell 13%. And Jackson National sold $304 million of the new product, fixed index annuities, through banks. The product’s sales grew sixfold from 2003.
The fixed annuity sales slump caught up with Jackson National in this year’s first quarter, however. It sold $391 million of the product in the 2004 first quarter, compared with $136 million this year, a 65% decline. Its fixed index annuity sales, however, grew 330%, from $27 million in last year’s quarter to $116 million in the first period of 2005. And variable annuity sales fell 17%, from $123 million in last year’s quarter to $102 million this year.
Mr. Garmhausen, who covered mutual funds for American Banker from 1997 to 1999, is a freelance writer in Brooklyn, N.Y.
