As the industry keeps changing, it's important to know a company's "pedigree."
By Linda Koco
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.
Alexander cautioned against reading too much into the big percentages that MVA annuities raked in.
Those percentages are based on very small sales numbers in the previous quarters, so the quarterly gains, measured by percentage, look very large, he said.
In terms of actual sales, MVA annuities in third quarter produced $2.5 billion, while indexed annuities produced four times that, at a little over $10 billion. (The total fixed annuity market sold $22.6 billion in third quarter, up 31 percent from second quarter and up 35.2 percent from the same year earlier period.)
Still, Alexander said, the $2.5 billion of MVA sales in third quarter is up from $1.3 billion in second quarter. That growth says a lot about the current direction of the MVA segment: Sales are chasing rates.
The trends underlying the rate increases are the spreads. Carriers are seeing higher credit spreads and wider spreads in the yield curve, Alexander points out. (Credit spread refers to the spread between yield on securities and risk-free bonds, and yield curve refers to the spread between 10-year versus one-year Treasury bonds.)
That’s important because “the fixed annuity business is a spread business,” the Beacon CEO said. When spreads were very narrow earlier this year and last, due to extremely low interest yields, the interest rates credited in fixed annuities were barely higher than rates in bank certificates of deposit. But when the spreads widened, some insurers started slowly raising their rates, including the rates on fixed-rate MVAs.
Bank certificate of deposit rates have increased too, but not by as much. That’s because banks have less latitude in what they can do with bond investments supporting their products than annuity carriers have with investments supporting their annuities, Alexander said.
As a result, bank certificate of deposit rates are typically lower than fixed annuity rates. This difference was hardly noticeable during the period of all rates were virtually down to the nub, but it’s starting to show up now.
Today, for instance, crediting rates on MVA annuities with a five-year interest guarantee period are currently between 1 percent and 3.6 percent, depending on the carrier and product, Alexander said. The average rate is in the neighborhood of 1.73 percent.
By comparison, the five-year Treasury bond yield is currently around 1.5 percent, and rates for five-year bank certificates of deposit are hovering around 2 percent on the high side, with more common offerings in the neighborhood of 1 percent, depending on bank, local and other factors.
MVA sales channels
The higher MVA annuity rates have not been lost on banks that sell annuities in addition to certificates of deposit. According to Alexander, banks increased their market share for MVA annuity sales to 26 percent in third quarter from 21 percent in second quarter. They increased their MVA sales numbers too, by 130 percent in comparison to second quarter.
Large regional broker-dealers stepped up their MVA writings as well. The MVA market share for this channel increased to 39 percent in third quarter from 32 percent in second quarter, on MVA sales that increased 127 percent compared to second quarter, according to Beacon statistics.
Meanwhile, the independent agency channel saw its MVA market share shrink to nearly 25 percent in third quarter from 37 percent in second quarter. “But their dollars went up to $593 million in MVA sales from $475 million in second quarter,” Alexander said. In addition, he said, this channel was already doing a significant amount of MVA business compared to other channels.
If rates continue to rise, will carriers become more competitive in the fixed-rate MVA market? “Carriers take on business when they can get the spread they need to make money,” Alexander said. “That’s more important than trying to compete at the cost of spread.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at email@example.com.
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