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2007 Index Annuity Returns
1/08
If you could have bought the best performing annuity on the first of each
month in 2006 your 12 monthly returns would have averaged 11.2% in 2007. If you
were unlucky enough to pick the worse performers your average earned interest
rate would have been 2.6%. The best and most consistent rate was earned by
annuities using the monthly cap forward method with a 12 month low average of
7.8% and a high of 10.5%. Annual point-to-point designs also did well with a
high average of 9.7% and a low of 3.8% - and the low was skewed by one
product that maintained a 4.75% cap for the entire year (without the low boy the
bottom APP return was around 5%. Averaging products with good
participation methods performed competitively returning 6.8% to 7.2%, the worse
ones credited 3.0%. Or, you could have simply put your money in a bouquet of
trigger method index annuities and averaged around 5.5%.
One point that needs to be stressed is the 6% to 10% earned on average on
these annuities cannot be taken back. Most annuities credited at least 50% more
interest than CDs for the period - many did much better - and no annuity owner
has lost value due to the current mortgage mess. An index fund investor may have
been up 20% in a year period ending 1 July 2007, but the index annuity owners
that were credited 10% to 13% in July have not been looking over their shoulder
in the recent market decline.
Fixed Annuities Are Competitive With Taxable Bond Mutual Funds 2/08
I compared fixed rate annuity, fixed index annuity and
taxable bond fund returns for five year periods beginning in 1992 and ending in
2007. My conclusions are that both fixed rate and fixed index annuities have been competitive with U.S. taxable
bond mutual funds and that index annuities are better positioned to provide a
no-market-risk alternative to these bond funds than traditional fixed rate
annuities.
From 1997 thru 2007 the taxable bond fund averaged 5.29% a year while the index annuity averaged 5.79%
If you look at the period from 1997 through 2007 the 5-year annualized
returns for the index annuities averaged 5.79%, the average taxable bond fund
return was 5.29% and the average fixed rate annualized return was 4.73%. For the
periods from 1992 through 2007 the average taxable bond fund return was 5.71%
and the average fixed rate annuity return was 5.18%.
The Data
Best’s Review was the source of the earlier annuity data representing
the initial and renewal rates for 56 carriers for the first four 5-year periods.
Fixed rate annuity returns for later years are from Noel Abkemeier of Milliman, Inc. and reflect rates for
annuities offered by “AA” or higher rated carriers not using MVA. I am
indebted to Noel for sharing this information. The index annuity returns reflect
reported annual reset returns ranging from 3 carriers for
the period ending in 2002 to 18 carriers for the most recent figures. I have 5
year data for the periods ending in 2001 and 2000, but for only one index
carrier and decided not to show it. The taxable bond fund data reflects the
average annualized returns for taxable bond funds for the five year periods as
reported by The
Wall Street Journal. The index annuity data reflects 1 October to 1 October periods, all
other data reflects 1 July to 1 July years.
Data Concerns
Fixed rate annuity return data for the first 5-year period
is from flexible premium policies and I noticed flexible premium rates were
tracking 11 to 18 basis points above single premium products in years when both
reported. It is possible a larger data set for the 1998-2000 periods would have
produced slightly higher returns. Fixed rate returns for the last seven 5-year
periods are from annuities issued by highly rated companies that do not use a
market value adjustment (MVA). It has been my experience that there is an
inverse relationship between rating and yield whereby yields tend to increase as
ratings decrease. I believe a larger data set that included lower rated annuity
carriers would increase average returns. In addition, it is argued that MVAs
allow carriers to increase rates because of the sharing of risk with the
annuityowner. Although I have never seen evidence of this, including MVA
products would theoretically increase overall reported yields.
The index annuity sample does not reflect returns from
term end point structured annuities because it would have severely skewed the
numbers. As an example, for the 5-year period ending in 2002 the annual reset index annuity returns were 7.8%, 8.2% and
8.7% for an average of 8.23%. The one term end point return was 12.2%, which
would have raised the average return to 9.2%, higher than any actual annual reset return. In addition, the index annuity
return data is self-selecting. It has been my experience that carriers are less
likely to send in return data when they perceive the returns as low, therefore I
believe the average index annuity returns shown are higher than a larger, more
random sample would have produced for the periods.
Finally, the fixed rate and bond fund data uses July to July years whilst the index annuity years start and end three months later. I do not believe moving the fixed rate and bond fund returns by three months would substantially impact the data relationships or conclusions reached.
Stats – Annualized 5 Year Periods
1992-2007 The average fixed rate annuity return is 5.18% with a standard deviation of 0.675. The taxable bond fund average is 5.71% with a standard deviation of 0.676. There is a .74 correlation between the fixed rate and bond returns.
1997-2007 The average fixed rate annuity return is 4.73% with a standard deviation of 0.590. The taxable bond fund average is 5.29% with a standard deviation of 0.408. The average fixed index annuity return is 5.79% with a standard deviation of 1.395 There is a negative .11 correlation
between the index rate and bond returns, which could have important asset allocation implications if this negative correlation is demonstrated in future return comparisons.
The
data support that index annuities are a viable alternative to taxable bond funds
What Does It Mean
Altho past performance does not predict future results the
data support that index annuities are a viable alternative to taxable bond
funds. And altho overall fixed rate annuity returns averaged roughly a half
percent less than bond funds in the study I believe if “A” rated carriers
had been included the results would have been much closer. Index
annuities may well be a superior choice than bond funds if the consumer falls
into the trap of selling when rates are falling and buying when fund yields are
peaking, moves that have been repeatedly demonstrated by investors in the past,
and this logic would also make fixed rate annuities a better choice than bond
funds for many consumers.
* The Wall Street Journal,
Average Annualized 5-Yr Taxable Bond Fund Returns; 7/3/96,
7/3/97, 7/6/98, 7/5/99, 7/10/00, 7/5/01, 7/5/02, 7/7/03, 7/5/04, 7/5/05, 7/5/06,
7/3/07
** Best’s Review,
3/96 p.51-57; 4/97 p.38-42
*** Milliman Inc. Companies rated AA or better
by S&P or Moody's. Based on policies with equal annual premiums;
consequently, renewal rates are influenced by premiums arriving in years 2-5.
No MVA or two-tier products.
**** Best’s Policy Reports notes from 10/00
4th Quarter Index Annuity Sales Slip 3/08
The Advantage Index Product Sales Report produced by AnnuitySpecs.com shows fourth quarter 2007 index annuity sales were $6436
million compared with sales of $6449 million for the previous quarter. Fourth quarter sales were flat when compared with third quarter sales and up 8% when compared
with the same period one year ago.
The
top ten carriers for the fourth quarter:
| Allianz
Life |
$
1,537,573,801 |
|
ING |
293,020,947 |
| Aviva |
1,062,241,588 |
|
NACOLAH |
247,200,000 |
| American Equity |
524,847,349 |
|
GAFRI |
227,359,390 |
| OMFN |
447,006,778 |
|
Equitrust |
221,033,241 |
| Midland
National |
401,500,000 |
|
Jackson
National |
214,339,502 |
Total sales for 2007 were $25.2 billion
Average Commission
The index annuity commission received by the agent averaged 8.07% of premium.
Average weighted commission paid by carriers ranged from 3.45% to 10.76% of
premium.
Average Issue Age
The average indexed annuity issue age reported was 64 years old; average issue
age ranged from 52 to 76.
Easy To Predict
4/08
Last
month The New York Times
used the “D” word in a story titled “Depression You Say? Check Those
Safety Nets” showing that concerns over this turn of the economic cycle had
reached panic levels among reporters looking for a catchy headline. Keeping in
mind that my rough research of
Wall Street economists finds their predictions are wrong 80% of the time, and
that I cannot claim a better accuracy rate, I still wanted to opine on what I
see as cycle realities.
It was easy to see coming
In August 2005 I wrote that a bear market and recession were coming. I said this
would happen by the end of 2006 (not counting on the effects of blind greed and
the greater
fool theory delaying the
start for another year). Part of my concern was interest rates had remained too
low in the recovery. The Federal Reserve Board, still fighting the last
inflation war, didn’t seem to realize that altho low interest costs might keep
corporate borrowing costs low and therefore corporate prices low, it also kept
monthly payments too low. American homebuyers do not understand actual value
they understand monthly payments, and low interest rates made it possible to pay
more and more for the same low value without needing to accept that fact that
this was dumb. Financial experts helped by creating new mortgage types that
further distorted the value relationship. And the mortgage companies expanded
the number of buyers able to buy real estate by not requiring homebuyers to have
any skin in the game. Essentially the real estate market turned into a huge
poker game where some of the gamblers kept bidding up the size of the pots with
the knowledge that if they were lucky they could keep the winnings, but if they
lost they wouldn’t be responsible for the losses.
The financial firms blithely ignored the reality that
many of the mortgages were worthless because they were paid based on the number of mortgages
written and not the ultimate quality. They created instruments that passed along
the risk to others, but then failed to evaluate whether the buyers of this risk
had the wherewithal to cover the risk.
A reason for this oversight is they made themselves
believe the financial quants 99% rule. The 99% rule essentially says if a
possible outcome is more than four standard deviations from the average outcome
it can be ignored because this means the odds of the outcome happening are less
than 1% according to the model used. Since the likelihood of a liquidity crunch caused by bad
mortgages was 25 standard deviations away from the expected outcome (Index
Compendium Sep 07) it was treated as an impossibility. The shell game was
Company A sold the default risk on a package of mortgage bonds to Company B and
Company B would be responsible for paying off in case of a default. However,
because the risk of default was so low – the 99% rule – no one required Company B to actually have the money to cover
the risk. Since the default couldn’t happen, based on the computer models
supporting the 99% rule, Company C gladly lent money to Company B to pay for
this risk. Of course if a default did happen Company B would not be able to
payback the loans to Company C or cover the original mortgage investors in
Company A.
Good bye Bear Sterns.
Inflation
The other part of my concern was the effects of $60 a
barrel oil (in 2005) on the economy and the deficit spending in Washington (an
aspect that is still being more or less ignored). The Consumer Price Index
calculates that offering a 25” TV next year for the same price as a “24”
inch TV this year offsets the inflationary impact of the price of bread going
from $1.50 to $2 a loaf and results in net inflation of zero. The screwy way
that changes in the CPI are deduced meant the Fed was able to delude itself that
what they were doing was working and inflation was low. In reality, costs on
real consumer goods were soaring.
The Economist
uses the Big Mac index to compare international prices; I use the Taco Bell
indicator. In 2003 you could buy a bean burrito from the Taco Bell value menu
for 99 cents. By 2004 the value menu had been revamped with the 99 cent bean
burrito replaced by this really gnarly 99 cent bean & rice burrito. The
nearest edible food was a new combo burrito for $1.19. Price of the new combo
burrito increased to $1.39 in 2006 and $1.59 in 2007.
The bottom line is five years ago I could get my Taco
Bell lunch for $2.10 with tax and today it costs $3.37 – a 60% increase or an
annualized inflation rate of 10% a year.
It is not only Taco
Bell prices that are up. The average family has seen their monthly gasoline bill
increase 140% during this time impacting all aspects of their life, and food
prices have soared due to poor global wheat harvests and a politician-driven
policy on gasohol. Rising prices and recession fears have caused some reporters
to dust off old articles on stagflation from the ‘70s
And annuity markets?
One nice thing about being retired is you don’t have to
worry about losing your job. However, recessionary fears cause stock markets to
swoon meaning the retirement nest egg gets smaller, and efforts to lower
interest rates mean that the interest earned from certificates of deposit and
money market accounts drops. Inflation means the cost of staples are going up
whilst income is going down. All of this creates a positive environment for
fixed annuity sales.
Falling rates means that fixed annuity rates and index
annuity caps will continue to fall. The good news is bank rates will fall
farther and faster. The 5% fixed rate or 7% index cap that is meeting some sales
resistance today will turn into fast selling 4% fixed and 6% cap rates six
months from now because CD rates will be at 2%. The sales environment for fixed
annuities will steadily improve.
Safety
Northern Rock was a British mortgage lender that got
into trouble in 2007. By early 2008 the Bank of England had dumped $108 billion
in loans and guarantees to Northern Rock. FDIC has $52 billion on hand. It is
interesting to note that the failure of one bank caused British regulators to
kick in more than double what FDIC has on hand to cover $4.35 trillion of
deposits.
Commercial banks originated and purchased mortgage
packages and I think we will see several bank failures as a result. I also
believe that FDIC coverage will be provided for all covered deposits (tho
uncovered deposits in failed banks will get back less than a hundred cents on
the dollar).
I have only looked at the balance sheets of a few annuity
carriers; some own suspect mortgage loans and some do not. I would not be
surprised to see an annuity carrier fail as the mortgage crisis fallout
continues. However, it is important to remember that insurance carriers look at
the financial world in a different way. Most of the financial
world seems to use that 99% rule where if the risk is less than 1% it is
ignored. By contrast insurance carriers are trained to look for hidden risk and
act accordingly. Insurers do not ignore 1% risks they target them and hedge to cover the
risk. This is why I believe fixed annuity carriers will generally weather this
financial storm better than banks.
FDIC can borrow all the money they need from the Treasury,
so if a bank fails the insured deposits should be available the next day. State
Guaranty Funds are funded in arrears meaning that after an annuity carrier fails
other carriers are asked for any needed money. This means that even tho an
annuity covered by a Guaranty Fund would eventually be paid in full the entire
annuity balance may not be immediately available.
Crystal Ball
I think this will be a nastier recession than the last
two and that the stock market still has some way to fall (but the fall won’t
be as bad as the millennium bear market). I think interest rates will drop in
2007 and then go up because this time there really is price inflation. I also
believe fixed annuity sales will increase as bank rates fall and consumers get
out of stock market investments and look for a safer place to put their money
(however, it probably makes sense to diversify annuities between carriers). All in all 2008
and 2009 will be tough years, but the cycle will turn once again.
2007
Index
Annuity Complaints Steady 4/08
In 2004 the index annuity
carriers averaged one customer complaint for every $614 million of premium sold,
in 2005 the rate was one complaint for every $310 million and in 2006 the index
annuity carriers averaged one customer complaint for every $119 million of
premium sold. In 2007 there was one complaint for every $109 million of premium.
What this means is there were roughly six times as many specific complaints
against index annuities in 2007 as there were in 2004.
There is a “but” in all of
this. Even tho the rate of complaints increased slightly from 2006 to 2007 for
all index annuity carriers if you exclude Allianz the complaints decreased.
Without Allianz the rest of the industry had a complaint rate of one for every
$145 million in 2007, down from $118 million the previous year. While all index carriers averaged one complaint per
$109 million of premium sold the top 25 carriers averaged one complaint per $111
million. The worst ratio for any individual top 25 index annuity carrier was one
complaint for each $50 million of sales.
The National Association of Insurance Commissioners (NAIC)
gathers data on customer complaints from all of the state insurance departments.
This information is available on the Consumer Information Source (CIS) part of
their web site http://www.naic.org/cis/index.do on a company by company basis. I
reviewed and totaled the number of closed customer complaints for 2007 relating
to index annuities. I found no complaints for seven carriers.
| 2007 Compliant
Ratio Top FIA Sellers |
(a higher premium means fewer
complaints) |
| GAFRI |
1 for every
$1,007,147,390 of premium |
Aviva/Amer
Investors |
1 for every
$131,707,817 of premium |
| Jackson
National Life |
1 for every
$297,833,525 of premium |
Equitrust |
1 for every
$125,495,866 of premium |
| American
Equity |
1 for every
$232,619,528 of premium |
Midland
National Life |
1 for every
$118,278,571 of premium |
| OM
Financial |
1 for every
$196,002,736 of premium |
Industry
Average |
1 for every
$109,056,690
of premium |
| ING |
1 for every
$187,514,847 of premium |
Allianz |
1 for every
$57,091,190 of premium |
Caveats
These closed customer complaints cover the gamut from fraud to delays in
policyholder services, and although the complaints are closed I am unable to
determine how many were resolved in the carrier or agents’ favor. The data
base relies on voluntary reporting from the state insurance departments and may
not be thorough. The NAIC database does not include complaints filed with state
security offices, NASD or SEC; however, it has been difficult for me to find
hard data from these other sources that would radically change the implications
of the data collected.
Comment
I saw a slowing in the increase of overall
complaints over the previous year, which is good news, but it is not as good as
a decline in complaints. Based on anecdotal evidence I believe part of the
reason for the increase is that annuity customers are being encouraged to
complain by securities salespeople, but the fact remains that there appears to
be more unhappy index annuity owners than there were a few years ago.
But
The Complaint Percentage Is Very Small
It is difficult to determine the percentage of complaints because this year's
complaint list may include a purchase from a previous year. However, whether the
complaint ratio is based on current year sales, in-force annuities, total index
annuity owners, or any other parameter the percentage of index annuity owners
that did not file a complaint has never been less than 99.7% and maybe as
high as 99.999%.
Data
Sources:LIMRA, NAVA, Annuityspecs.com
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