By Cyril Tuohy
Fixed index annuities (FIA) sold like hot cakes last year, racking up big numbers in all directions.
To recap: $38.71 billion worth of FIAs were sold last year, up 13.2 percent from 2012, according to Beacon Research. The fourth quarter alone saw sales of $11.75 billion, up 39.1 percent from the year-ago period, Beacon also reported.
FIAs represented four of the five top-selling fixed annuity products and seven of the 10 top-selling fixed annuity products in fourth quarter 2013, Beacon said. For the year, four of the five top sellers and six of the top 10 sellers were indexed annuities.
“Fourth quarter 2013 marked a number of milestones with respect to fixed annuity sales, contributing to a banner year for the industry,” said Jeremy Alexander, Beacon Research chief executive officer.
What’s the draw to FIAs? Low interest rates, for starters.
Index annuities, a hybrid between a fixed annuity and a variable annuity (VA), are linked to the performance of indices which include stocks or bonds, said Dana Pedersen, vice president and product officer for The Phoenix Companies.
Often the indices are plain vanilla, but there has been an increase in proprietary indices developed in conjunction with an insurance company and an investment bank. With either model, though, the idea is the same: to offer the client upside potential without downside risk.
With many of the proprietary indices, the idea is to reduce or control the volatility of the returns generated by the index. Volatility control is what most of these proprietary indices have in common, Pedersen said.
FIA investors retain a modicum of opportunity to profit from a rising market, but do not suffer when the market declines.
The level of volatility control varies within the indices, and FIAs appeal to annuitants with more, or less, risk tolerance. The annuitant is typically a preretirement investor or one already in retirement who can’t afford big swings in their portfolio.
Proprietary indices allow for some creativity as actuaries and annuity experts gather to create an index with more tightly controlled volatility parameters.
FIAs offer “more upside than a fixed annuity, but not as much as a variable annuity,” Pedersen said in an interview with InsuranceNewsNet.
Pedersen, who is responsible for annuity product development and pricing with Phoenix, also said FIAs are filling in some of the gaps left by insurance carriers pulling back on the sale of VAs in an effort to reduce their exposure to expensive guarantees.
VAs, which are regulated as investment products, offered generous riders but those disappeared as companies curtailed the benefits in the wake of the financial crisis.
Advisors who like FIAs value them as income planning tools and for the protection they bring in declining markets. They also see them as a way to lock in gains and as a vehicle to deliver higher yields relative to banking products. They also like their tax-deferral advantages, and, in some cases, for the payouts that can be higher than those offered by VAs.
Disadvantages of FIAs include limited upside gains, no dividends, complicated call options, surrender charges and teaser rates.
Allianz Life, the leader in FIAs last year with its Allianz 360 FIA, launched its Signature 7 FIA family in November. “This FIA can also help prepare customers for the secure retirement they desire by providing them with flexible options,” said Eric Thomes, senior vice preside of Allianz Life.
Signature 7 allows annuitants to allocate funds to the Standard & Poor's 500 index, the Russell 2000 Index and the Barclays US Dynamic Balance Index or any combination of these indexes, according to Allianz Life.