For Annuities, It’s Looking Like A Very Good Year
November 1, 2018 by Ben Mattlin
In late summer, the LIMRA Secure Retirement Institute released several startling facts about the annuities market:
1. Total sales in the second quarter had jumped to a level not seen since the first quarter of 2015—they were nearly $60 billion, a 10% increase from the second quarter a year earlier and 15% more than in the preceding quarter.
2. Of that, fixed annuities were dominant, outpacing sales of variable annuities (VAs) by nearly 27%.
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3. Within fixed annuities, fixed-index annuities (FIAs) posted quarterly sales that surpassed the previous record by 12 percentage points—they were nearly $18 billion in the second quarter, a jump of 17% from the corresponding period a year earlier and 21% from the preceding quarter.
4. Perhaps most surprising of all, after 17 consecutive quarters of sales declines, variable annuity sales rose 2% to nearly $26 billion in the quarter.
“This is the first time in more than four years that quarterly VA sales have increased,” says Todd Giesing, the LIMRA Secure Retirement Institute’s annuity research director.
The Effect Of Vacating The DOL Rule
While it’s only a 2% jump in VA sales, the turnaround can at least partially be attributed to the end of the Department of Labor’s fiduciary ruling. The Obama-era ruling, intended to protect consumers by eliminating conflicts of interest among broker-dealers and ensuring full disclosure of fees, was officially “vacated” by an appellate court in June. It had effectively challenged many insurers’ distribution models, favoring fees over commissions, but was widely considered unclear in many aspects.
The impact of its demise can’t be overstated, Giesing insists. “It’s a key component to the rise in sales for both fixed and variable annuities,” he says. The regulation, he goes on, was “lengthy, vague and up for interpretation. … But now that the uncertainty is out, some of the pent-up demand is coming back into the market.”
Other industry watchers agree. The appellate court ruling lifted a burden off the industry’s shoulders. “The strict DOL rule that was approaching, and has since been struck down, limited consumer choices by forcing broker-dealers to create product bucketing,” explains Jessica Rorar, a senior planner at Akron, Ohio-based Valmark Financial Group, referring to the strategy of grouping different retirement products to collectively address specific goals. “This product bucketing may have taken products off the shelf at some broker-dealers, or perhaps the broker-dealers restricted commissionable products in general. The demise of the DOL rule has brought choice back to the consumer.”
Annuity Differences
In annuities, the chief distinction is fixed versus variable. Variable annuities hold assets in mutual fund-like subaccounts that rise and fall with the underlying equities. Fixed annuities are CD-like contracts that credit the annuity-holder with a guaranteed fixed interest rate, usually for a fixed period of time, while maintaining principal. Fixed indexed annuities, the most popular type of fixed annuity, sometimes simply called “indexed annuities,” link accounts to an index, such as the S&P 500, via a formula, but they do not invest directly in tradable securities.
Though the fixed indexed annuity sales growth has outpaced that of variable annuities, the net assets in VAs remain much greater. At Valmark, for instance, Rorar says “a majority of the premiums we receive goes into VAs—about 80%—but that’s not the sector that is growing as rapidly. About 6% of the annual premiums we receive goes into indexed annuities.” So far this year, she says, variable annuities are up more than 30% over 2017, while fixed indexed annuities have more than doubled.
One reason variable annuity assets continue to be so high is simply that they’ve been around longer. “The overall in-force assets of VAs is a little more than $2.1 trillion, and for indexed annuities that number is around $400 billion,” says Giesing. “That’s a significant difference, and it comes from when these products were introduced. VAs have been around since the 1950s, whereas indexed annuities didn’t hit the market until the mid-’90s.”
Several Factors At Play
Of course, there are several factors at play in annuity sales. One is rising interest rates, which tend to make fixed annuities more attractive. Fixed indexed annuities in particular had a record-setting quarter, partly due to “stronger economic conditions, resulting in products with higher cap rates and no downside market exposure,” says Alison Reed, executive vice president for distribution operations at Jackson National Life Distributors in Denver.
She’s referring to the fact that fixed indexed annuities generally have both caps and floors—i.e., limits on gains and losses—to buffer volatility. The appeal of high cap rates will likely continue to drive sales of these products.
“One of the primary reasons that indexed annuities have passed VAs in sales is the principal-protection feature,” says Daniel Thomas Jr. of Thomas Financial Group in Troy, Mich. “They might be restricted on their upside growth, but it is the downside- or principal-protection feature that has made indexed annuities so popular between advisors and their clients.”
For all these reasons, Thomas expects that the “FIA market will continue to grow,” he says. Moreover, he notes, the lifetime-income stream that annuities can throw off (usually for a fee) adds to their appeal. “With our clients living longer, many are willing to pay a fee to purchase a lifetime income [so] they don’t outlive their money,” he says.
More Variety = More Sales
Another cause of rising annuity demand could come from the rising and diversifying annuity supply. “Our strategy of expanding the product portfolio and distribution continues to drive meaningful progress,” says John Kennedy, head of retirement solutions distribution at Lincoln Financial Distributors, an annuities provider headquartered in Radnor, Pa. “This quarter, new products and expanded distribution drove 28% of our annuity sales.”
One example of a new type of annuity product that’s rapidly gaining market share is the structured annuity. A variation on the indexed annuity, it typically has a higher cap and, often, a “buffer” that absorbs a degree of index declines. Buffers are different from the traditional floors, because they protect annuitants only against the first 10% or so of losses. Floors, on the other hand, set a maximum downside limit. These products are specifically designed for those nearing retirement or in their first few years of retirement.
Good For The Bulls And The Bears
In a way, annuities can benefit from both a bull market and market volatility. The value of variable annuities and fixed indexed annuities tends to increase with a rising stock market, while the relative safety of fixed annuities—including FIAs—can make them particularly popular during downturns. “The rising markets have led to asset growth for consumers,” says Kennedy, “and volatility has reminded them it is important to protect their assets, especially [if they are] approaching retirement.”
If true, that means that overall annuity sales could keep growing no matter which way the markets go. “FIA sales will continue to increase due to the nine-year bull market,” says Rorar. “If there is a slight pullback in the market, people tend to get out of VAs and move into more conservative products.”
Such as fixed annuities.
Annuities are considered a safe alternative to stocks. “Market volatility is one of the primary reasons my clients give for wanting to explore annuities as an investment tool,” says Richard Dalzotto, a Pittsburgh-based registered representative with the Investment Center. “Investors seem to be slowly getting away from chasing gains and are now focusing on strategies to protect their portfolios against market loss. The recent bull run seems to be causing people to focus on preserving their current principal or protecting a stream of income so they don’t have any disruptions to their lifestyle when we enter the next bear market.”
FIAs And VAs May Remain Strong
So Dalzotto believes that both fixed-index annuities and variable annuities will continue to be strong. “Insurance companies are developing and offering products with features not available with other types of investments,” he says. “I predict that we will continue to see an increase in annuities investments for many years to come.”
For the future, no matter which way the stock market goes, the outlook for annuities appears promising. “This bull market has had a long run, and greater market volatility is creeping in,” observes Troy Dryer, vice president of business development at Investment Provider Xchange (IPX), a Centennial, Colo.-based financial services concern for businesses. That could be good for annuities. “The guarantees and insurance options are starting to become more attractive in a market that is starting to look uncertain,” he says.
What’s more, he adds, a growing population of retirees is looking for distribution that protects principal. “FIAs, if structured correctly, could be a good payout option for individuals who need a dependable stream of income,” says Dryer.
Whatever the reasons, Giesing at the LIMRA Secure Retirement Institute projects that sales will continue to be steady at least in the medium term. “Early indications are looking good for both fixed and variable business,” he says. “We expect a stronger second half [of the year], with slight growth in VAs and stronger growth in fixed annuities.”
And if sales remain strong, you can bet that insurance companies will keep introducing new and innovative annuity contracts to attract and keep that growing customer base.
