Midwood Financial Services — an Encino, Calif., annuities distributor — says it has found a wealth of new assets by distributing index annuities through channels that include banks.
Alan H. Blank, the firm’s president, said index annuities, which Midwood began offering two years ago, comprised 27% of its new business last year and are expected to make up a growing share for the next two to three years.
“A high percentage of customers who do not purchase a fixed annuity or a security are willing to purchase an index annuity,” Mr. Blank said. “This represents incremental revenue to banks.”
Analysts said the product suits investors’ wariness about the market and dissatisfaction with the low returns on typical annuities.
Index annuities, which were introduced in 1998, are investment products built for investors worried about risking their premium but seeking a better rate of return than fixed annuities offer. The product offers an investor the opportunity to get the rate of return on a given index during a predetermined surrender period. If the index declines, the investor is guaranteed to be repaid his or her initial investment.
Mr. Blank said the product is perfect for the sort of cautious people who would invest through a bank. Most of the 117 banks through which Midwood distributes — ranging from community bank size to more than $40 billion of assets — already offer index annuities, he said.
Mr. Blank, who helped develop variable annuity distribution for American Skandia Life Assurance Corp. before leaving in 2000 to start Midwood, said the product has grown in the bank channel because two years ago the cost of selling it fell significantly.
“Banks typically sell low-commission, consumer-friendly products to wary investors,” Mr. Blank said. “This product has just become more consumer-friendly and gained a lot of appeal to banks.”
Kenneth Kehrer, the president of Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks banks’ annuity and life insurance sales, said index annuities have surged. “In the last year and a half sales have grown rapidly,” he said. “I mean, it is still small compared to fixed annuities, but it is growing rapidly because of certain improvements in the product design.”
Midwood is a company that distributes insurance company products to other distribution channels, including banks. Last year, 5% of its sales were through banks, but Mr. Blank said he expects this share to rise.
Banks are interested, Mr. Blank said, because the product offers more attractive returns than fixed annuities’ but does not pose the risk of investing directly in equities.
Data from Advantage Group, a St. Louis research firm, show that $23.3 billion was invested in index annuities last year, up 66.4% from 2003. The research firm said banks accounted for $900 million of the 2004 sales and bank volume was up 80% from the year before.
Banks had a 4% market share last year, up from 3.3%.
Paul A. Werlin, the president of Human Capital Resources, a St. Petersburg, Fla., recruiting and consulting firm for bank investment programs, said the product sells surprisingly well on bank platforms and through dedicated reps.
An index annuity is not a replacement for the typical annuity, Mr. Werlin said, but is a very different product. Many insurers — like Jefferson Pilot Financial in Greensboro, N.C., and Baltimore’s Fidelity and Guaranty Life Insurance Co. — have done well at creating consumer-oriented index annuities, he said.
Carmen Effron, the president of C F Effron Co. LLC in Westport, Conn., said index annuities are well-positioned, particularly in midsize banks. “Index annuities fit in the slice between fixed and variable annuities,” she said. “Cautious investors that feel like taking risk like this product because there is a safety net below them.”
“This product enables banks to start to attract the percentage of wallet that an existing customer may not be investing because up to now the customer is not interested in the investments being offered,” said Midwood’s Mr. Blank. “This is an untapped niche.”
