As Boomers Retire, Annuity Business Outlook Sunny
At the core of American International Group’s decision Thursday to acquire SunAmerica is a retirement savings vehicle that few understand, many scorn, yet millions have purchased: the variable annuity.
“The annuity business is at the heart of SunAmerica’s retirement savings business,” noted Michael Ancell, financial services analyst at Edward Jones brokerage in St. Louis. “And it’s the annuity business that AIG wanted.”
Variable annuities are tax-deferred, mutual fund-like investments wrapped in a layer of life insurance. Money invested in a variable annuity isn’t taxed until it’s withdrawn.
In the meantime, annuity investors can spread that money among a choice of 10 to 20 portfolios, or sub-accounts, that invest in stocks, bonds or stable investments such as money-market funds.
The tax deferral feature has been key to annuities’ success, of course. The industry has on several occasions in the 1990s suffered scares, as some in Congress have suggested limiting annuities’ tax deferral benefit. (The proposals have gone nowhere.)
But it’s the variable annuity’s link to the equity market that has given the insurance industry something it sorely needed: a relatively aggressive investment product with which to lure younger, stock-fixated customers.
Indeed, with a majority of the nation’s 76 million baby boomers already skeptical that the Social Security system will be solvent when they enter retirement years, variable annuity sales are booming as investors shovel money away for retirement.
In fact, variable annuities are the fastest-growing segment of the life insurance industry.
Industrywide, variable annuity sales rose 18% from 1996 to 1997, according to the Variable Annuity Research & Data Service, in Marietta, Ga.
By comparison, net new cash flow into equity mutual funds rose only 4% between those two years.
Variable annuity sales in the first half of this year are even stronger: They’re up 20% from the first two quarters of 1997.
The industry is on track to reach $100 billion in sales this year, which would break 1997’s record of $87.7 billion.
Despite its influence in the commercial and life insurance industries, AIG has never had much of a presence in the domestic annuity business, analysts say.
And with more than 100 companies already selling about 250 different annuity products, the domestic annuity market has matured too much for even a newcomer with AIG’s heft to win valuable “shelf space” with national broker-dealers.
A number of broker-dealer distributors have even begun limiting the number of annuity producers they’ll do business with.
Notes Sanford C. Bernstein analyst Weston Hicks in New York City: “The days of starting up a new annuity company are over.”
But while the domestic industry is mature from the standpoint of the number of companies offering annuity plans, “We’re really only at the embryonic stage of growth for annuity sales,” argues Lou Harvey, president of Dalbar, a Boston-based research firm that tracks the financial services industry.
“We have 70 million baby boomers who are going to cross age 50 in the next 15 years,” Harvey says. “They’ll soon begin to worry about retirement and whether they’ll outlive their income.”
SunAmerica has the annuity brand-name awareness and the distribution system that AIG figured is needed to take a growing share of those anticipated annuity sales, analysts say.
A buying spree in recent years has brought a host of new broker-dealers under SunAmerica’s roof. Between its wholly owned dealers and its affiliated dealers, the company has 9,500 sales reps nationwide pushing annuities--giving it the fourth-largest retail securities sales force in the country.
Even without the potential for sales of annuities in other countries--which SunAmerica can reach via AIG’s network--”I expect the annuity boom in the next 15 years will dwarf what we saw in mutual fund investing in the last decade,” Harvey said.
This, despite the fact that many financial planners say investing in conventional mutual funds often is a better option than putting money into a variable annuity.
Why?
Total expenses for variable annuities are higher, on average, than those for the typical mutual fund, critics charge.
The typical variable annuity imposes fees of 2.09% of assets annually, versus 1.44% for the average mutual fund, according to Morningstar Inc., the Chicago-based mutual fund tracker.
For a person in the 28% federal tax bracket, it would take approximately 15 years to make up through tax deferral what you can lose as a result of seeing those higher fees chew up your returns, said Patrick Reinkemeyer, editor of Morningstar’s Variable Annuities/Life Performance Report. (That’s assuming both investment options generate 10% annual returns.)
Lake Oswego, Ore.-based financial planner Glen Clemans ran his own numbers and came to a slightly different conclusion. Clemans believes that it takes, at most, nine years, depending on your tax bracket and the rate of returns for your investments, to make up for variable annuities’ higher fees.
In general, he says, variable annuities should be purchased only after “you’ve maxed out all your other pretax savings options, such as 401(k)s and IRAs.”
But industry officials stress the advantages of variable annuities.
While an IRA requires mandatory withdrawals beginning at age 70 1/2, variable annuity investors can keep their money in the market, tax-deferred, well beyond that.
Also, variable annuities pay a death benefit to the plan owner’s beneficiaries. And an annuity gives investors the choice of several payout, or “annuitization,” options, including guaranteed payments for life.
Annual contributions to IRAs are capped at $2,000, added Mark Mackey, president of the National Assn. for Variable Annuities in Reston, Va. For those who want to put more money away toward retirement, the variable annuity is a solid option, Mackey said.
Ironically, annuity sales have been helped by the popularity of the new Roth IRAs.
Even though IRAs are themselves tax-deferred accounts, some life insurance companies continue to market variable annuities as appropriate investments to put into an IRA--even though most financial planners say there’s no logic to such a “double umbrella.”
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New Financial Powerhouse
The planned merger of global insurance giant American International Group Inc. and retirement-savings specialist SunAmerica Inc. would create a company with about $36 billion in annual revenue and a broad insurance and investment product line for consumers and businesses. A look at the two companies:
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Hot Stocks
Shares of both SunAmerica and AIG have been spectacular performers in the 1990s, as the financial services industry in general has boomed. Year-end stock prices and latest on the New York Stock Exchange:
SunAmerica
Thursday: $71.38, +$7.13
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AIG
Thursday: $87.50, --$7.13
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Annuity Sales Soar
SunAmerica has become one of the country’s major sellers of annuity contracts--tax-deferred investment and insurance accounts aimed at aging baby boomers. SunAmerica’s annuity sales, in billions:
1997: $2.8 billion
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AIG
1997 revenue: $30.6 billion
1997 net income: $3.3 billion
1997 return on equity: 14.5%
Earnings growth, 1993-97: 77%
Operates in 130 countries
Product lines:
Property and casualty insurance
Individual and group life and health insurance
Risk-management services
Asset-management services
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SunAmerica
1997 revenue: $5.3 billion
1997 net income: $379 million
1997 return on equity: 21.2%
Earnings growth, 1993-97: 174%
Operates in United States only
Product lines:
Annuities/life insurance
Brokerage/financial planning
Mutual funds
Trust services
Sources: SunAmerica; Bloomberg News; Value Line Investment Survey
Name Game
Despite SunAmerica’s push to increase awareness of its name, some of its customers may know it by other names. What SunAmerica owns:
Insurance/annuities:
Anchor National Life
CalAmerica
First SunAmerica
John Alden Financial
SunAmerica Life
Polaris (brand)
Seasons (brand)
Sterling Select (brand)
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Broker-dealers:
Advantage Capital
FSC Securities
Royal Alliance
SunAmerica Securities
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Trust services
Resources Trust Co.
Source: SunAmerica
