A little-discussed annuity sales trend is lurking in the fixed annuity sales numbers for 2012. This is the subtle advantage that market value adjusted annuities appears to have gained over fixed annuities that do not have a market value adjustment feature.
Specifically, in 2012, sales of market value adjusted (MVA) annuities fell by nearly 24 percent compared to 2011, whereas sales of non-MVA annuities fell by 33 percent, according to Beacon Research.
MVA products are fixed annuities that might either nick certain withdrawals made during rising interest rate environments or bump up the withdrawal amount during falling interest rate environments.
That MVA numbers might not sound like a big deal, since both MVA and non-MVA sales were off substantially and since the entire annuity industry pretty well took a pasting last year.
Still, Judith Alexander, director of sales and marketing at Beacon, believes the comparative sales performance between MVA and non-MVA annuities bears watching. It is a sign of annuity market dynamics now in the making, with consumers accepting more risk in return for slightly higher interest rates.
The MVA design
To understand that, it helps to recall the nature of MVA annuities. Such products are fixed annuities that typically make an “adjustment” to annuity withdrawal amounts if the owner makes an early withdrawal (before the end of the policy’s surrender charge period) and if the withdrawn amount is greater than the policy’s annual penalty-free withdrawal amount.
The adjustment can be positive or negative, based on whether prevailing interest rates at time of withdrawal are lower or higher, respectively, than rates were at time of policy issue.
During falling and very low interest environments such as today’s, MVA annuities get more industry attention than they do in higher interest environments. That’s because carriers view MVA products as a deterrent to “disintermediation,” which is the risk that policyholders will, once interest rates rise again, cash in their older, low-interest-paying annuities and invest elsewhere.
The thinking is that owners of MVA annuities will not want to do that because the value they receive will be reduced by not only the surrender charge but also the MVA.
Disintermediation is something the fixed annuity industry typically wants to avoid. That’s not only because it leaves carriers with fewer policies on the books to balance out their other in-force business but also because disintermediation can be costly. Carriers feel the cost impact if they must sell investments at a discount when the policyholder makes an early withdrawal. The investments sold would be the ones the carrier had originally purchased – at lower rates – to support the annuity from which the policyholder now wants to take early leave.
It’s this disintermediation-fighting capability that makes the MVA an attractive product for annuity companies to sell during low interest environments.
Not insignificantly, the products have a plus for consumers, too. In many, if not most, MVA annuities, consumers can get a more competitive interest rate than available in non-MVA annuities. For rate-hungry consumers, that can be a strong selling point.
There is a trade-off, however – namely, consumers assume the risk of seeing a potential MVA nick on early withdrawals they might make sometime in the future when interest rates are higher.
In the MVA annuities he has seen, Robert J. Chester, state insurance examiner in the Connecticut Insurance Department, said the higher rates are showing up as comparatively higher guaranteed minimum interest rates, interest crediting rates and/or annuity purchase rates (used in annuity income calculations).
The rates aren’t a lot higher than rates in non-MVA annuities, he noted, but they are noticeable.
Back to the numbers
Beacon Research noticed the shifting relationship between MVA and non-MVA sales while preparing its industrywide fixed annuity sales study for 2012, a study that found industrywide fixed annuity sales were down by 11.6 percent for the year.
The study also found that non-MVA annuities far outsold MVA sales – by $18.8 billion to $4.6 billion, respectively. By comparison, those sales came in well below the 2011 results of $29 billion and $6.3 billion, respectively.
That’s not all Beacon found, however.
The researchers also noticed that MVA sales fell by a lower percentage than the non-MVA sales (23.6 percent versus 33 percent, respectively).
A look back indicates that this trend actually surfaced in 2011. According to Beacon’s numbers, MVA sales had fallen 3.1 percent that year from the year before, whereas non-MVA sales had fallen by 5.5 percent. The gap between the two was not as substantial as in 2012, but the firming up on the MVA side appears to have started then.
One carrier in particular made MVA headway in 2012, according to Alexander. That was New York Life. “It shifted much of its fixed rate business from non-MVAs to MVAs, pushing its MVA market share to 16.7 percent, from just 2.7 percent in 2011.”
Most MVA products use the multi-year guaranteed annuity (MYGA) design, and the average sales-weighted interest guaranteed period elected in those products was 5.3 years, she pointed out. By comparison, the average in 2011 was 6.2 years.
That drop in the average guarantee period, in just one year, “shows that consumers and advisors don’t want to make long-term commitments, especially now, most likely because they are expecting rates to go back up.”
How did the non-MVA annuities fare by comparison? In 2012, the weighted average interest guarantee period was 2.98 years, down from 3.2 years in 2011.
But most of the non-MVA products are single-premium deferred annuities (SPDAs) with interest rates that renew yearly, Alexander pointed out. For that reason, the interest guarantee period is less important in the sense of consumers making a long-term commitment to the credited rate than with the MVA products, she said.
“The rates on non-MVA SPDAs in 2012 were so low as to be unattractive,” she said. For example, in banks, their sales fell by 44 percent over 2011, whereas MVA annuity sales in banks fell by only 12 percent.
What does it all mean?
Rates are so low that it is difficult for carriers to sell non-MVA products in this environment, Alexander contended.” The carriers risk a lot if they do, including the risk of disintermediation if rates suddenly rise.”
If a carrier is going to be in the fixed annuity market, “there is little that could happen that is worse than having huge policy surrenders occur that they didn’t plan on,” Alexander added. “It’s terrible for carriers.”
Actuaries are pretty good at predicting surrenders when interest rates rise, she allowed, but if rates jump, “surrenders could go through the roof.”
The impact would be especially acute since yields on insurer investment portfolios have been declining gradually. The declines happened as carriers replaced maturing higher-interest earning investments with new low-interest investments bought during the low-interest rate environment.
So, there may be more MVA annuities in the not too distant future than there are now. The Connecticut department is already seeing an increase, Chester said. “We’ve seen more new MVA products filed in the past year or two than previously, and that includes MVA features in indexed annuities as well as traditional fixed annuity policies.”
The annuity carriers are “starting to eat their own,” he observed. “They’re not going to make it up with interest, so they’re looking for ways to reduce risk as best they can.”