2014 Sales of Variable Annuities the Lowest Since 2009
March 30, 2015 by Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
WASHINGTON – As total U.S. sales of variable annuities fell last year to their lowest level annually since 2009, some traditional buyers of variable annuities may be choosing another lifetime income strategy such as an indexed annuity, according to a vice president of research for the Insured Retirement Institute.
According to Morningstar Inc., which partners with the IRI on the data, year-end 2014 sales fell to $137.9 billion, a 3.4% decline from 2013.
According to Limra’s Secure Retirement Institute, sales of these stock market-linked retirement savings and income products fell to $140.1 billion, a 4% drop. Both Limra and Morningstar said their figures represented the lowest sales of variable annuities annually since 2009.
There is “some shifting in demand within the marketplace,” and some traditional buyers of variable annuities may be opting for another lifetime income strategy such as an indexed annuity with a guaranteed lifetime withdrawal benefit, Frank O’ Connor, vice president of research for IRI, told Best’s News Service.
Generally, a guaranteed lifetime withdrawal benefit, on a variable annuity, is the guarantee on the promise of a certain percentage — about 5% — of a guaranteed benefit base that could be withdrawn each year for the life of the contract holder, regardless of market performance or the actual account balance, according to the IRI.
“Consumers have a wider array of lifetime income options available to them than they’ve had in the past,” O’Connor said in a email.
According to a March 16 Best’s Special Report on variable annuities, equity markets continued to reach new highs in 2014, life/annuity companies have benefited from increased fee income from higher assets under management, reserve releases and lower net amount at risk in their variable annuity blocks. Agents are once again touting the benefits of tax deferral through investment only variable annuities rather than complex benefit features, which has contributed to a meaningful reduction in overall risk.
For the year, net assets closed 2014 at $1.92 trillion, up 2.7% from 2013, according to Morningstar. “Overall, assets under management continued to grow as strong financial market performance buoyed the industry,” said John McCarthy, senior product manager of annuity products for Morningstar, in a statement.
By company, with 2014 sales of $23.07 billion, Jackson National Life Insurance, a unit of the U.K.’s Prudential plc, again captured first place in variable annuity sales, according to Morningstar.
Lincoln Financial Group, the marketing name for Lincoln National Corp., took second place, with sales of $13 billion. Coming in at No. 3 were American General Life Insurance Co. /Variable Annuity Life Insurance Co. (VALIC), with sales of $12.71 billion. Both companies are part of American International Group’s life and retirement business. TIAA-CREF took fourth place, with sales of $12.56 billion.
Rounding out the top five was Aegon/Transamerica, with year-end 2014 sales of nearly $10.1 billion, according to Morningstar. Transamerica is part of Aegon USA Group, whose Netherlands-based parent is Aegon N.V.
For all types of annuities, sales rose 3% in 2014 to $235.8 billion, mostly on indexed and income annuities, according to Limra.
With indexed annuities — a type of fixed annuity — an insurer invests most of the customer’s principal in bonds to ensure the policy will generate a small annual return but uses a small portion of the premium to buy options in a stock market index, usually the S&P 500. Options that are exercised can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.
After the financial crisis, companies exited the variable annuity market, and others de-risked, Steven Schwartz, an equity analyst with Raymond James & Associates, recently said. Low interest rates “made it expensive to hedge.” Meanwhile, due to the increased costs of hedging, “some sellers no longer think the guarantees are worth the cost,” he added.
Distributors of variable annuities, such as wirehouses and other broker-dealers, Schwartz said, “are less interested in selling guaranteed product because of the greatly increased cost of the riders and the limited — and very conservative — subaccounts in which contract holders are now allowed to invest. Given the prices and the restrictions, many sellers no long think the riders are worth having for their clients.”
Due to redemptions, in the fourth quarter, net sales of variable annuities were negative by an estimated $3.3 billion, Morningstar said.
Speaking to the annuity industry overall, “The year witnessed the continued expansion of deferred income annuities, regulators greenlighting qualifying longevity annuity contracts, and further development of investment-only variable annuities,” said Cathy Weatherford, president and CEO of IRI, in a statement.
Jackson National Life Insurance Co. currently has a Best’s Financial Strength Rating of A+ (Superior).
