SAN DIEGO - While a number of major carriers have exited the annuity industry due to capital constraints, continued volatility and historically low interest rates, key players contend that there is still plenty of capacity to meet growing market demand.
"Certainly there are real and foreboding challenges and we need to be prudent in balancing customer needs with our shareholders' interests," said Bruce Ferris, executive vice president, sales and distribution at Prudential Annuities, a unit of Prudential Financial Inc. in Newark, N.J.
"But overall, the health of the life insurance industry is resilient, and we continue to see evidence of growing demand," Ferris said. "Survey after survey continues to point to the value that investors and clients place on guaranteed or sustainable income."
On Monday, Ferris moderated a panel at the annual meeting of the Insured Retirement Institute being held in San Diego this week.
While there are many in the industry who complain that annuity products aren't able to yield as much in the current low-rate environment as they did before the financial crisis, Ferris contended that investors are also suffering from the same headwinds, and are searching for better yields than what other guaranteed income products are currently offering.
Indeed, the average national CD yield is 32 basis points, he says. With $2.6 trillion in cash on the sidelines and $1.8 trillion in bonds coming due, a growing number of investors will likely choose annuities over other guaranteed income products.
And guaranteed income is looking increasingly attractive to many, Ferris added.
"Brokers-dealers tell us the average recommendation for systematic withdrawal is just under 3.5%," he said. "If you look at 3.5% for a couple 65 years old, there is an 89% chance they won't run out of money. We offer certainty versus chance."
Moreover, despite the headwinds, carriers are managing to deploy their excess capital into existing and new business ventures, and some are increasing dividends and repurchasing shares, Ferris said.
Randy Freitag, chief financial officer at Lincoln Financial Group in Radnor, Pa., said fundamental demand for annuities hasn't changed over the last decade.
"We have an aging population, and governments and private employers continue to reduce their guarantees to employees, so there is a real reason for this product to exist, and a real reason for Lincoln to participate," Freitag said.
In fact, other carriers will likely follow the lead of Forethought Financial Group in Houston and enter the annuity market, he said.
"I don't know how many people who want to buy a variable annuity can't, so supply and demand are equal," Freitag said. "It is short-sided to assume that companies won't come into the marketplace, to make a good return and manage risks appropriately on the products they sell."
Michael Reardon,Forethought's executive vice president and chief financial officer, says that entering the annuity market with the purchase of Hartford Financial Services Group Inc.'s individual annuities distribution platform, was "absolutely consistent with our strategy to develop and offer products for the senior middle market."
Forethought anticipates rolling out new variable annuities products sometime in 2013, Reardon said. Overall, the annuity industry stands to be very profitable for the company.
Because of "the enormous size of the market - and its only going to get bigger - we can get a reasonable return for the company, as long as we implement risk management in a way that the underlying funds are managed," he said.
Fortunately, most of the large-scale changes to annuity products to compensate for continued low interest rates has already occurred within the industry, Reardon said.
"We're able to come into the market pretty rational," he said. "It's also a very good market opportunity to take in new business using an organization that has allowed us to get into the business in a meaningful scale from day one."
Thomas A. Swank, president and chief executive officer, individual savings and retirement at Transamerica Insurance and Investment Group in Los Angeles, said there is plenty of capacity, but it has to be capacity at the right price and the right design.
"We've got to make sure we're adjusting to the capital markets relative to our product designs," Swank said. "All of us have gotten much better at understanding all of the levers that can be pushed in order to be in the marketplace."
One of the questions to the panel from the audience was whether there was going to be continued "product deterioration."
Swank responded that carriers are "going to constantly value why we're staying in the marketplace, and so we're constantly have to look at what's going on in the capital markets and evolve with that."
"There just can be no longterm positions on products," he added.
Freitag added that the industry wouldn't likely enact the same kind of large-scale product changes they did over the past several years. However, the industry would still continue to "modestly tweak" the products when necessary, he said.