The fixed annuity business is rife with new players trying to move into the space, offering aggressive interest rates to attract new clients. But New York Life Insurance Co. believes it is better to remain slow and steady and stay in business than make a splash and fizzle out after a few quarters.
The tortoise strategy seems to be working for New York Life. According to Kehrer-Limra, a financial services and research company, New York Life is the top seller of fixed annuities in the bank channel year-to-date. “That is one of the advantages of being a 164-year-old mutual fund company,” said Chris Blunt, executive vice president in charge of Retirement Income Security at New York Life. “We don’t have to change. We just do our thing.”
And it shows. New York Life is one of the last triple-A credit rated life insurance companies left, he said. “This is a business where you need to take a long term perspective,” Blunt said. “We don’t think we need to have, or should have, the highest payout, but we need to have a competitive payout.”
Yet remaining competitive is becoming more difficult these days as companies use every tool imaginable to undercut their rivals, even if it means putting their own balance sheets at risk.
This is what American International Group’s subsidiary, Western National, may have done to beat out New York Life for the number one spot as the top seller of fixed annuities in the bank channel in the third quarter. Ken Kehrer, founder of Kehrer-LIMRA, said Western National has been able to attract more clients by making special arrangements with banks to reduce commissions so that in turn it could offer clients higher interest rates.
Kehrer said that AIG may have made the decision in the third quarter to “chase the rate,” which is what those in the industry call it when a company pays out higher interest rates than their formulas tell them to in order to boost their client base, in the hopes of making that money back by slashing the interest rate when its time for customers to renew their contracts.
Pacific Life also went out on a limb in the third quarter, offering a 3% guaranteed interest rate for contract renewals, well above its rivals’ offers of 1.5% to 2%.
New York Life, on the other hand, maintains its profit margins, although it may lose out on sales to those companies offering special high interest rates for new customers. To guard against that, New York Life offers shorter-term contracts—three years instead of the usual four—and it bought options so that if interest rates spike unexpectedly, the firm will receive a payout to help mitigate some of the pain, Blunt said.
“We tend not to compete on price, we compete on quality,” he said.
Kehrer said New York Life’s advantage over rivals has been two-fold. First, clients looking for quality financial services have turned to New York Life because of its bedrock financial strength. Second, New York Life credits interest on new deposits on a portfolio basis, meaning new clients and existing clients who are renewing their contracts are paid the same interest rate, Kehrer said.
By contrast, most insurance companies slash interest rates at renewal time, giving New York Life a distinct advantage, he said.
To be sure, selling fixed income annuities takes a lot of capital, which is why there are so many insurers that come into—and quickly leave—the market. Over the last several years, as the financial crisis ran its course many insurers, which had been selling variable annuities, moved into fixed income annuities. As the market recovers those companies either go back to selling variable annuities or they become strapped for cash.
Which is why, Blunt said, New York Life doesn’t worry about which companies come in and out of the space. It is New York Life’s consistency that has kept it in business for so long, he said. “I don’t think there was ever a year when we were number one every quarter,” he said. “But at the end of the year we’re always number one or number two. If a company’s being aggressive for one quarter we’re not worried. It’s not about hitting home runs sometimes and missing completely others. It’s smooth and steady over time that gets you to number one.”