By Linda Koco
Contributing Editor, AnnuityNews
Agents who don’t sell or know about annuities with market value adjustment features might want to start boning up on them now. That’s because carriers that don’t yet have the feature on their annuities are scrambling to add them.
A market value adjustment (MVA) is a provision in fixed annuities. It says that if the policy owner surrenders the contract during the surrender charge period, the owner may get back less than the original amount invested if current interest rates are higher than the contract guaranteed rate. On the other hand, if current interest rates are lower than the original amount, the owner may get back more.
“A lot of annuity carriers already have MVAs, but those that don’t are busy adding them to their products right now,” says Danny Fisher, president of the Fisher Agency, a Dallas brokerage general agency.
One carrier he knows has been working on the approval in Texas for six months, and other carriers have had similar timelines.
Interest rate concern
The carriers are persisting on securing MVA approvals largely because of concerns about the interest rate environment, Fisher says. Today’s fixed annuities are paying very low interest rates, he explains.
But carriers are concerned that if rates go up substantially, today’s annuity owners may want to move their money out of existing policies with the low interest rates and into products that credit higher rates, Fisher says.
The thinking is that the MVA adjustment will, in those circumstances, deter many policyowners from making those moves.
If rates go up by a small amount, say to 4 percent from 3 percent, it is unlikely that many annuity owners will bother to move the money, Fisher allows. “It would depend on where the owners are in their surrender charge period as well as on other factors,” he says.
But if rates go up to 7 percent or 8 percent, a lot of annuity owners would want to move the money, he says. “The companies are trying to protect themselves against that eventuality.”
The MVA would work like a killer rate in such situations, because policy owners would need to pay not only the MVA but also the surrender charge, Fisher says. If an owner is, say, in the middle of the policy’s surrender period, the two charges together would likely cause most people to wait until the surrender period is over before surrendering the contract, he says.
The MVA feature also makes a big difference in reserves, Fisher says, explaining that the reserves are “absolutely more favorable” on these products than on non-MVA annuities. The companies like that, he says.
Another factor is competitiveness. “The MVA enables the carrier to credit a slightly higher interest rate than comparable non-MVA products,” explains Judith Alexander, director of sales and marketing at Beacon Research.
It is true that, in today’s low-interest rate environment, many annuity carriers do not want to write a lot of annuity business, so they are not all that concerned about offering the most competitive rates, Alexander says.
“But other carriers do want to compete on rate in today’s environment. In fact, 43 percent of companies in the Beacon database did increase their fixed annuity sales in third quarter. Some of these carriers want to be in the top quadrant in rates, and the MVA enables them to do that.”
To illustrate, Alexander shows some examples from her firm’s annuitynexus database. A multi-year guaranteed (CD-type) annuity with an MVA, written for a three-year interest period, could be crediting 1.129 percent interest today versus a fixed annuity with no MVA (a “non-MVA annuity”), which today would be crediting 1.05 percent. (See accompanying chart.)
That’s a 0.79 percent uptick — or “MVA bonus” -- to the policy owner who buys the MVA product, she says.
Buyers who choose the eight-year MVA annuity would get an even larger bonus, of nearly 1 percent. The MVA product would credit 2.071 percent interest, whereas the non-MVA annuity would credit only 1.112 percent.
Overall, the MVA annuities have an average bonus to interest of 0.269 percent interest (roughly 27 basis points), Alexander says.
Low rates mean low sales, for now
Bonus notwithstanding, MVA products are not big sellers this year, because of low interest rates.
The Beacon database says MVA fixed annuity sales are down 15 percent year-to-date, and down 33 percent in third quarter 2011 versus the same period last year. The sales are even down by 15 percent compared to second quarter 2011.
Numbers from LIMRA corroborate the trend. MVA annuity sales are down 33 percent in the third quarter, to $1.2 billion, in third quarter and down 15 percent year to date, the Windsor, Conn. researcher reports.
A lot of the time, the MVA sales track with overall fixed annuity sales, Alexander points out. And, because the MVA base is small, the percentage shifts tend to loom large. These factors may help explain some of the decline noted this year.
In addition, she says, what is happening in the distribution channels can affect the sales trend. MVA annuities tend to be sold through marketing firms, such as brokerage general agents, independent marketing organizations, and broker/dealers (B/Ds), Alexander says. The biggest sellers in third quarter were the independent producers and marketing organizations, who took a 45 percent MVA market share. The B/Ds came in second with a 28 percent share, and banks come in third at 20 percent.
Time was, several years ago, that banks absolutely hated to sell MVA products, Alexander recalls. But they’ve changed their tune due to the economic downturn. In the first quarter of this year, their MVA market share was 28 percent.
“I think the banks have found that customers are desperate for yield, even if it means taking an annuity with a MVA.”
It’s not just banks. Fisher sees the same thing in his independent agency. He tells of a woman who just bought a five-year fixed annuity with an MVA that does not allow penalty-free withdrawals during the surrender charge period. He says he tried to talk her out of it, but she insisted. “She said she intends to keep the contract for the full period, and she doesn’t care about the liquidity. She wants the rate.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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