The outlook for bank-sold fixed annuities in 2006, after a year in which short-term interest rates overtook long-term rates, remains dependent on whether the Fed changes course, according to industry observers.
High short-term interest rates, which have made certificates of deposit competitive with fixed annuities’ average base rate, may force banks to adopt new marketing strategies to boost their fixed sales, analysts said. But if the Fed cuts short its rate-hike campaign, fixed annuity sales could rebound, they said.
Interest rate movements will be a crucial influence on fixed annuity sales volume this year, said Carmen Effron, the president of CF Effron Co. LLC, a Weston, Conn.-based bank insurance consulting firm.
Since June 2004, the Fed has raised the federal funds rate for overnight lending between banks to 4.25%, from 1%. The market expects one more quarter-point increase at the Fed’s meeting this month and perhaps a second hike at the March meeting, but the central bank’s plans for 2006 as a whole remain ambiguous.
Michael White, the president of the Michael White Associates bank insurance consulting firm in Radnor, Pa., said he sees no clear prognosis for the fixed annuity market this year so long as the rate environment remains fluid.
“It’s been pretty gloomy,” Mr. White said. “I don’t see much changing until the spread changes in the next year. You can’t sell fixed annuities when you’re not in a core interest rate environment.”
Banks’ fixed annuity sales have declined almost steadily since April, when volume was $2.5 billion, according to Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks bank sales of investment and insurance products. In July the fixed annuity base rate slipped below the average rate for one-year bank CDs for the first time in at least a decade, and fixed sales through banks were seen as slumping in response.
Fixed sales fell 19% from September to $1.2 billion in October, the latest data available, the Kehrer firm said.
There are early indications that the Federal Reserve will not raise rates as aggressively this year as in 2005, Ms. Effron noted. In the minutes of their December meeting, released Tuesday, Fed officials suggested that they plan to raise rates just once or twice in the next few months.
Most industry observers believe that fixed annuity sales will remain lackluster in the first quarter but pick up steam later in the year as the Fed “takes a more normalized approach” to rates, Ms. Effron said. “There’s less of a fear that fixed annuity sales will remain sluggish” in 2006.
The Fed minutes, however, also cited concerns about potential inflationary pressure from higher energy prices and accelerated business spending, leaving open the possibility that the Fed would continue raising rates.
Banks may be able to boost fixed annuity sales by underscoring their appropriateness for investors nearing retirement, Mr. White said.
“There is this huge baby boom generation starting to move toward the retirement period,” he said, “and they need a more or less guaranteed retirement income stream.” Steady income is particularly important to boomers because many have not done adequate retirement planning, he added.
Fixed annuities are also attractive to investors approaching retirement because earnings in the annuity accumulate tax-free, and policyholders can designate a beneficiary, Mr. White said.
Some bank insurance operations have emphasized other products, such as variable annuities, whole life insurance, and single-premium variable life insurance to offset the fixed annuity slump, Mr. White and Ms. Effron said. Variable annuities, for the first time in years, have begun to outsell the fixed product in the bank channel; the Kehrer firm reported $1.6 billion of variable sales in October.
Index annuities, a type of fixed annuity that lets investors participate in the stock market’s upside potential by investing a portion of the premium in bonds and another portion in a stock market index, have cushioned the overall decline in fixed annuities, the Kehrer firm has said. Demand for variable and index annuities has grown as investors seek higher returns in an environment of declining long-term rates, it said.
