Variable-annuity sales, buoyed last year by innovative riders and favorable market conditions, should continue to outpace fixed-annuity sales this year, analysts say.
Whether the variable products can meet their expectations - something that did not happen last year - remains an open question.
Related Link A full collection of American Banker's Review/Preview articles assessing the past year in banking and analyzing the trends most likely to take hold in the next year can be found
But analysts said a variety of factors contributed to a sense that last year's gains were not as strong as they could have or should have been.
"Guarantees and riders and strong market conditions helped fuel sales, but most banks acknowledge that they were disappointed in variable-annuity sales in the third quarter when market conditions were strong," Kenneth Kehrer, the unit's director of research at Kehrer-Limra in Princeton, N.J, said in an interview last week. "There was consternation, because people expected sales to be even better."
Heavy scrutiny, caused by federal and state investigations into the insurance industry, made it harder and more expensive for banks to sell variable annuities, Mr. Kehrer said.
"There was a lot more paperwork, and some people felt like everyone was looking over their shoulder when it came time to sell a variable annuity," he said. "Maybe for some banks it just became easier to talk about mutual funds instead."
John Harline, the head of variable-annuity distribution for banks and financial institutions at ING Group NV, said that sales of variable annuities increased throughout the industry last year, and that he expects the momentum to continue this year, despite the regulatory scrutiny.
"We really expect sales to be healthy in 2007," he said. "There is a lot of competition, and firms are hiring more wholesalers, and there will be a lot of competition on a daily basis, but I expect healthy sales as we strengthen relationships with banks."
Mr. Kehrer said market conditions were unfavorable for fixed-annuity sales in the bank channel last year.
"Because the yield curve is so flat, investors could get higher returns this year by investing in a CD than they could by buying a fixed annuity," he said.
In the first nine months of last year ING sold $1.72 billion of variable annuities and $670 million of fixed ones. About 15% of its sales for each type of annuity were through financial institutions.
Chad Tope, the head of fixed-annuity distribution for ING, said that even though it was a difficult year for fixed annuities, some products, such as index annuities - fixed products that invest in indexes - still had strong sales. Nevertheless, he also said it is tough to predict a resurgence for fixed products this year.
"A lot of banks are still selling traditional fixed products, but for the most part, bank sales have fallen off," he said.
In late 2005 and early last year many annuity providers began offering variable annuities with "living benefit" riders that guarantee income for life while preserving the potential to benefit from a market rally. Such products accounted for 87% of variable-annuity sales in 2005 and 89% in the first half of last year, according to data from the Seattle research firm Milliman Inc.
Investors do not want "a pretty good chance at income for life; they want a guarantee," said Greg Salsbury, the head of bank distribution for Jackson National Life Distributors LLC of Lansing, Mich.
"Until now the majority of retirement income solutions have fallen short for retirees," Mr. Salsbury said. "Now these products guarantee that they will have enough. The right variable annuity with the right living benefits provides investors with a floor and an ability at some upside, depending on the market."
More important than the fancy new bells and whistles, the reason more variable annuities were sold last year was because baby boomers are shifting their assets from products geared for asset accumulation to products geared for distribution, he said.
"There is a huge focus for banks to create and offer the best solutions as people move towards retirement," Mr. Salsbury said.
In the first nine months of last year Jackson National's sales of variable annuities through banks jumped 52% from a year earlier, to $475 million, while its sales of those products through all channels rose 48%, to $5.1 billion.
Mr. Salsbury said he expects Jackson National to maintain this momentum this year, since only 25% of banks are currently selling annuities.
"Banks enjoy a strong presence and a strong credibility, and they are well positioned to win the war for retirement assets, but in many cases they don't have the right products or the right advice offering," he said. "Jackson's strong results over the past couple of years are gaining notice in the bank channel. There are a lot of people who are anxious to expand their relationship with us."
Mr. Tope said ING is always looking to create innovative fixed annuities to boost sales. "We are starting to see more firms looking at variable-annuity-type withdrawal riders for fixed annuities. They are titled the same and might look the same, but for different products. These products are creeping in."
Late last month American International Group Inc.'s AIG Annuity Insurance Co. of Houston launched a lifetime income benefit option for new contract holders of its retail and bank proprietary fixed annuities; the option was the first in the industry for traditional fixed-annuity contracts.
Contract holders who use the option are guaranteed not to outlive their income, and they can receive annual withdrawals of 5%. Until the product was launched, lifetime income benefit options were available only on individual variable annuities and fixed indexed annuities.
Mr. Kehrer said that these types of riders played an important role in the growth of variable-annuity sales, and that many companies, including MetLife Inc., added wholesalers to increase distribution of variable annuities through banks.
