Fixed-rate market value adjusted (MVA) annuities made a big splash in third quarter, with sales jumping 88.1 percent over the previous quarter and 131.5 percent over third quarter last year, according to Beacon Research.
The products represented 11 percent of total fixed annuity sales in third quarter, up from 7.7 percent in second quarter, Beacon reported. And their third quarter sales are the highest they have been since third quarter 2009.
Those are eye-rubbing numbers, especially for a product line that the industry seems to have forgotten to talk about. Why this did happen and where is this business going?
The MVA design
One reason for the big gain has to do with the structure of fixed-rate MVA annuities.
Fixed-rate market value adjusted annuities are written for a specified interest guarantee period, say five or 10 years. If the owner cashes out before the end of the guarantee period, the carrier will “adjust” the surrender value up or down, depending on whether then-prevailing interest rates are lower or higher than at time of purchase.
In return for putting the contract’s interest rate risk on the shoulders of the buyer, the carriers typically offer higher credited interest rates on MVA products than they do on non-MVA policies.
During the prolonged low interest rate environment of recent times, those higher rates were actually pretty low, so many customers avoided them, saying they did not want to be locked into low rates for several years.
But now that interest rates are beginning to climb, the rate differential is getting more attention, Beacon chief executive officer Jeremy Alexander said in an interview with InsuranceNewsNet.
“Annuity producers are using the products in laddering strategies,” he said. For instance, a producer could ladder five-year MVA policies — which Beacon says accounted for 67 percent of fixed-rate MVA annuity sales in third quarter — over a period of 10 or 15 years, or combine them with policies of other durations or with other types of annuities.
Another reason for the huge upswing is that one carrier — New York Life — wrote a lot of MVA business in third quarter. In fact, the company’s Secure Term MVA became the top seller of all fixed annuities during third quarter, according to Beacon.
(The other top fixed annuity sellers were not MVA policies. According to Beacon, these were, in descending order, Security Benefit Life’s Total Value indexed annuity, New York Life’s NYL Lifetime Income Annuity, Massachusetts Mutual’s Stable Voyage fixed-rate non-MVA, and Western National’s Proprietary Bank A, also a fixed-rate non-MVA.)
All about rates
The broad interest rate environment in the general economy is another reason for the jump in MVA sales. “The fixed-rate MVA market is all about rates, and the rates have been going up, so sales went up,” Alexander said.
This was true for every type of fixed annuity product, he added, noting that “all types produced gains in third quarter, not just MVA annuities.”
But the MVAs produced greater sales gains than the others. For instance, while MVA annuity sales were up 88 percent over second quarter, fixed-rate non-MVA products were up 71 percent, income annuities were up nearly 19 percent, and indexed annuities were up 10 percent, according to Beacon’s third quarter report.
Similarly, when compared against third quarter performance last year, MVA annuities in third quarter 2013 were up an eye-popping 131 percent, while fixed-rate non-MVA gains were not even half that, coming in at up by nearly 61 percent. In the year-over-year comparison, indexed annuities were up 15 percent, and income annuities were up by 10 percent.