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By Cyril Tuohy
For variable annuities (VAs) sold through the bank channel, it has been a tough few quarters as insurance carriers cut back on VAs and as interest rate spreads favored fixed annuities over bank certificates of deposits.
The rise of fixed index annuities (FIAs) further cut into any gains VAs might have made.
First-quarter fixed and variable annuity (VA) sales though banks reached $9.4 billion, an increase of 31 percent compared to the year-ago period. Higher fixed annuities sales were the major reason for the increase, Bank Insurance & Securities Research Associates (BISRA) said.
VA sales in the first quarter declined to $4.1 billion, from $4.5 billion in the year-ago period, BISRA reported. VAs, which a few years ago had been the high flyers of the annuities universe, have ceded ground to their fixed-rate cousins.
Scott Stathis, BISRA managing director, said that after the recession, carriers started cutting back on VAs. Low interest rates meant that many insurance carriers couldn’t keep up with the generous benefits VAs were offering before the crisis.
As a result, many carriers tried to sell their annuity portfolios, or to buy them back from annuity holders.
VA benefits were watered down and carriers raised the cost of the benefits. “They just don’t have the juice they once did,” Stathis said in an interview with InsuranceNewsNet.
Traditional leaders in the VA space, Prudential and MetLife, have dialed back their VA sales with other carriers -- notably Lincoln Financial, AIG, AEGON/Transamerica and Nationwide -- picking up the slack, according to BISRA data.
MetLife, for example, dropped to the No. 9 seller of bank-sold VAs in the first quarter, according to BISRA. In 2011, MetLife was the No. 1 seller of bank-sold VAs.
Total VA sales at MetLife plunged to $10.6 billion last year, from $28.4 billion in 2011, the company said.
Other factors are at work in the decline of VAs through the bank channel.
Interest rates, which began to rise last spring and lasted into the fall, meant that fixed annuities were starting to pay significantly more than CDs. Due to wider spreads, fixed annuities offered a brighter near-term future for depositors and retirees who came into the bank to roll over investments with anemic yields, Stathis said.
“It’s all about the rate spread,” he said.
Spreads between fixed annuities and CDs have more than doubled over a 12-month period ending in mid-May.
In the meantime, the annuity industry wasn’t sitting back. It kept innovating with new products, and their latest hit was the FIA, which racked up $1.74 billion in bank-sold sales in the first quarter, up from $774 million in the year-ago quarter, according to BISRA.
Poof! Just like that, another billion dollars went to a new class of annuities. This new hybrid class of annuity, one defined as delivering “downside protection and upside potential,” is positioned between fixed and variable annuities.
Without the popularity of FIAs, it would have been logical to believe some of that money would have gone into VAs.
Stathis said that VAs have suffered for a fourth reason: banks crave fee-based business. Recurring revenue generated by fee-based products is less sensitive to market volatility than the spread business, whose products are based on transactions and rely more heavily on the movement of interest rates.
“Advisors will tend to steer new annuity sales to fixed annuities over VAs and that’s further eroding VA sales,” he said. “If you look at the revenue mix in the bank channel, it’s looking more like a broader mix than in the past.”
VAs made up 19 percent of annual bank channel revenue last year, down from 35 percent in 2009, according to BISRA’s Annual Benchmarking Study. Fixed annuities also declined over the same period.
Money-managed fees and trailers, by contrast, made up 29 percent of annual bank channel revenue last year, up from 17 percent in 2009.
“It used to be all annuity business, but now it’s more about the advisory business and more about the alternative investments and market-linked CDs,” Stathis said. “Banks are trying to be broader, not just an annuity shop, so that’s taking volume away from annuities.”
Financial advisors working for a bank or an investment subsidiary see clients at between three and five bank branches in their territory. Many only will handle clients who have assets above a certain amount.
Annuities are still very profitable for banks. Income earned from the sale of annuities at bank holding companies reached a record $3.43 billion last year, up 9 percent from 2012, according to a separate report published by the bank consulting firm Michael White Associates.
Bank annuity fee income increased in each quarter of 2013, White said.
BISRA data show that the top 10 sellers of variable annuities through the bank channel in the first quarter were Jackson National, AIG, Aegon/Transamerica, Nationwide, Lincoln Financial, Pacific Life, Prudential Annuities, AXA, MetLife, Allianz Life, Forethought Annuity and Ohio National.
BISRA was created by the Bank Insurance & Securities Association (BISA) and the life and retirement research organization LIMRA.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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