Is the consumer romance with fixed indexed annuities likely to continue next year or might it start to fizzle as consumers seek other eligible prospects?
Three leading annuity experts gave the thumbs up to “continue” during at a panel at the annual Retirement Industry Conference last week in New Orleans.
They had reasons.
First, here’s a refresher on the record sales the product line has seen in recent times. In every quarter since second quarter 2011, fixed indexed annuities sold over $8 billion per quarter, according to statistics from LIMRA, which co-sponsored the conference along with LOMA and the Society of Actuaries. In fourth quarter 2012 alone, sales reached $8.5 billion, up from $8.1 billion back in second quarter 2011.
Meanwhile, all other types of fixed annuities—book value, market value adjusted, single-premium immediate and structured—sold only $9.2 billion in fourth quarter 2012, down from their seven-month high of $13.2 billion in second quarter 2011, according to LIMRA figures.
And variable annuities sold just $35 billion in fourth quarter 2012, down from their seven-month high of $40.6 billion in second quarter 2011, the LIMRA data shows.
Quarterly variable annuity sales are still much higher than indexed, but the indexed annuity trajectory over the past seven quarters has meant that indexed sales have helped the fixed side of the business close the fixed/variable gap. Comparatively speaking, then, indexed product sales have been on a tear.
Why is that?
Why have the indexed products sold so well while other fixed annuities and variable annuities have not, and where it is all going? That was what panel moderator Brian Wilson wanted to know. He is assistant vice president-fixed annuity product management for Lincoln Financial Group.
One reason is that fixed interest rates have been at historical all-time lows, said panelist Sheryl Moore, president and chief executive officer of Moore Market Intelligence. When rates are low, indexed annuities tend to do better than traditional fixed annuities, she noted.
Another reason is consumer demand for safe money products. Many consumers are uncomfortable with the fluctuations in the market, she explained, noting that this point comes up repeatedly in the phone calls her firm receives from consumers.
“People often ask whether it is true that indexed products will not have any losses due to the market,” Moore noted. When she says it’s true, they respond that this is all they wanted to know. She said she does inquire whether they are looking for growth, and mentions that 1 percent growth might be possible in today’s market, but most callers say they are not interested in that.
“What concerns them most is that zero percent guarantee (in the indexed annuity). It’s a strong value proposition for someone who is looking to save for retirement.”
Another driver for indexed sales is the volatility and uncertainty in the markets, Moore said. Any time markets decline, variable annuity sales drop, and any time fixed interest rates go up, fixed annuity sales go up, she pointed out.
But in 2012, the market conditions were different—markets were volatile and interest rates very low. Consumers responded by downshifting interest in either variable or traditional fixed annuity sales.
In fact, “for every one dollar in (traditional) fixed annuity sales that came in last year, there was almost one dollar in indexed annuity sales coming in,” Moore said. The trend has become so pronounced that her firm is now projecting that by year-end 2013, indexed annuity sales will surpass (traditional) fixed annuity sales.
Indexed annuity sales won’t surpass variable annuity sales, however. But Moore noted that trends in the variable annuity market—with carriers limiting guarantees such as lifetime benefits and offering buyouts to customers—have the potential to affect sales in an adverse way going forward. The unspoken implication is that variable market dynamics are in place that will favor indexed annuity sales.
Other developments in the variable annuity market, including carriers pulling out from that market altogether, have also contributed toward shining a spotlight on the indexed annuity industry, added panelist Kim O’Brien, president and chief executive officer of the National Association of Fixed Annuities (NAFA).
Can this continue?
Moore believes that indexed annuities will continue to see sales increases, for reasons having to do with the changing nature of the indexed annuity market.
For instance, non-traditional distributors are expanding into the business, she said.
“Banks and wirehouses, which have traditionally not been big fans of the product, are latching onto it and running with it. That’s not just because the security status (of indexed annuities) is not in question at this time, but also because their other sources of revenue are waning, so they are looking for an alternative.”
In addition, many companies are feeling “bullied” into entering the fixed indexed annuity business, Moore said. These are firms that formerly were not interested in the products but now are saying they have a “very strong interest in indexed annuities.”
Many companies offer only (traditional) fixed and variable annuities, she explained. They feel the see-saw effect of variable annuity sales going up when the market is up and fixed annuity sales going up when interest rates were up, she explained, noting that the assets “just shift from one side of the house to the other” depending on which side is up.
But in the recent economy, with its market volatility and very low interest rates, variable sales declined but the assets went “flying out the door to competitors,” she said.
Those competitors were firms that offered indexed annuities, Moore said.
As a result, companies that formerly did not want to offer indexed annuities are now deciding to develop those products.
NAFA’s O’Brien likened the indexed annuity’s future prospects to those that lay before universal life policies in the 1980s and beyond.
When universal life first came out, she recalled, it triggered the same kind of reaction that indexed annuities first encountered in the marketplace. “Universal life was the bad poster child of the life insurance industry,” she explained. “But the product slowly gained traction and acceptance.”
Today, there are now indexed versions of universal life in the market, O’Brien pointed out. The presence of those products in the industry will play favorably toward the indexed annuity, she predicted.
Expect a blip or two
The industry will not be without challenges and sales dips, however. Panelist Jack Marrion, president of Advantage Compendium, predicted that “first quarter sales will cycle down, and probably through the rest of the year.”
The reason: “It’s hard to get people excited about a 2 percent to 3 percent cap(the maximum rate used in an indexed annuity’s interest crediting calculation). That’s just the reality right now.”
To put things in perspective, Marrion pointed out that the industry did roughly $34 billion in indexed annuity sales last year. By comparison, “$60 billion a month went into bank money markets—because people wanted to see where things were going before committing to longer term products.”
Marrion said he doesn’t foresee any big move until changes occur in interest rates.
When changes do occur, however, Marrion predicted that sales will turn back up for indexed annuities. “Because of the (spread) relationship between 10-year Treasury bonds and corporate bonds, when Treasury rates improve, that will help yield, and that will bring (indexed annuity) caps up. And that will bring sales back up.”
O’Brien detailed several legislative and regulatory issues that may affect the industry going forward, including tax reform, lack of understanding of indexed annuities among federal regulators, the potential impact of a proposed fiduciary standard, etc.—but she also noted there are favorable trends, such as certain state-level developments.
The overall picture from the panelists is that the industry will have its challenges but that safe-money-oriented consumers will still want indexed annuities, and that more carriers and distributors will be offering the products this year. So the romance with indexed annuities appears likely to continue.
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