Here’s a dilemma that many annuity investors haven’t had to face in many years: as rates rise, the price of their fixed annuity investments fall. Who wants to buy their old annuities if new annuities coming into the market are paying more interest?
Good question, and one that Security Benefit Life in Topeka, Kan., have set out to answer.
The company’s solution is the floating rate annuity, a fixed annuity that credits an extra fraction of a percentage based on the London Interbank Offered Rate, or LIBOR, on top of the guarantee period base rate.
The new annuity, marketed as RateTrack, offers a five-year guarantee period option which yields a base rate of 2 percent and another 0.63 percent based on the three-month LIBOR rate. Total credited interest rate in the first year: 2.63 percent.
The company’s seven-year guarantee period option credits investors 2.4 percent and 0.63 percent based on LIBOR for a credited rate of 3.03 percent in the first year, according to Security Benefit’s website.
If U.S. interest rates rise, LIBOR will also rise since the Interbank rate typically tracks the benchmark federal funds rate. If rates falter, LIBOR will also falter.
The LIBOR component is reset upward or downward annually and the total credit interest rate is reset annually on the contract anniversary.
For investors wedded to fixed income products, that’s an improvement over many fixed annuities offering 2 percent, and it’s a whole lot better than a bank certificate of deposit or a money market instrument.
Experts Favorable to Floating Rate Product
Jon Legan, an illustrations analyst for Annuity Rate Watch, an independent annuity database firm outside Boston, said RateTrack represents a “whole new category” of fixed annuity, not just a new index geared to control volatility on an indexed annuity product.
RateTrack’s simple, uncluttered design and the product’s reasonably generous interest rate floor offers encouraging signs that new products can be more simplified and transparent.
“It’s so much more clear to the consumer what they are getting and what they can hope for down the road,” Legan said in an interview Thursday with InsuranceNewsNet.
But will this particular type of fixed annuity, launched March 21, win over consumers in a world where fixed annuity sales rose 7 percent last year over 2014, mostly on the strength of fixed indexed annuities (FIA)?
“I do think the product will do well,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink, annuity data tracking services in Pleasant Hill, Iowa. “I also think that other insurance companies are going to copy Security Benefit Life’s design.”
RateTrack offers relatively competitive credited rate, she said, “without the risks of reserving for a typical MYGA (multiyear guaranteed annuity). Plus, it helps Security Benefit Life to guard against disintermediation, once interest rates increase.
“It will be interesting to see which insurance company will be the first to join SBL in this new quasi-MYGA dance,” she added.
Sold Through Multiple Channels
Doug Wolff, president of Security Benefit Life, said RateTrack will be attractive to banks and financial institutions that sell fixed annuities and CDs to a primarily conservative clientele. Independent advisor representatives should also find some appeal to the floating rate annuity.
Advisor feedback indicated many annuity investors hesitant to invest in annuities now if interest rates were poised to rise in the near future.
“When savers and consumers are nervous, they sit on the side in cash waiting for rates to go up but they have suffered,” Wolff said.
With average national yields on CDs yielding around 0.27 percent and money market funds yielding 0.11 percent, savings may be liquid but they are also losing value, even to low inflation.
Security Benefit feels the time is right to launch a floating rate annuity because the long bull run in fixed income is coming to an end, interest rates remain historically low and the equity market is volatile, Wolff said.
Fixed income investors willing to stretch a little more for yield will find themselves rewarded thanks to the LIBOR “float.”
The LIBOR component, in effect a floating index, offers RateTrack annuitants a hedge against the lower account values dictated by rising interest rates. In theory, the floating rate instrument means no loss in market value of the annuity as a potential buyer will want to pay full market value for the investment, Wolff said.
But what happens when LIBOR rates diverge from the federal funds rate benchmark, as they did between the second half of 2008 and late 2009?
LIBOR briefly rose while the federal funds rate dropped. LIBOR eventually fall back to track the federal funds rate, but in any case a floating rate annuity investor would have benefited as LIBOR rates were higher before falling to track the benchmark.
Unlike the popular FIAs that tie credited interest to a backward look over how an index performed in the past, RateTrack is tied to the current rate movements. That is why Legan considers Security Benefit Life’s floating rate annuity a true hybrid annuity.
It incorporates elements of traditional fixed annuities while at the same time paying “homage” to FIAs by offering annuitants “upside” pegged to LIBOR.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].