Fixed annuity sales soared 14 percent to a record $117.4 billion in 2016 as annuitants turned in billions of dollars’ worth of contracts following the expiration of a seven-year surrender period, LIMRA Secure Retirement Institute reported Tuesday.
Fixed-rate deferred annuity sales led the way with sales of $38.7 billion, an increase of 25 percent compared with 2015, LIMRA SRI also reported. Fixed annuities eclipsed the $100 billion in variable annuity sales estimated for the year.
“A large block of fixed-rate deferred annuities purchased in 2009 came due in the first half of the year, creating a significant amount of money in motion,” said Todd Giesing, assistant research director for LIMRA SRI.
In 2009, at the height of the financial crisis, a large volume of fixed-rate deferred annuities were sold very quickly as investors sought safety and principal protection from a collapsing economy, he said.
The annuities, which carried relatively attractive interest rates, were typically sold with three, five and seven-year surrender charge periods.
In 2016, annuities with the seven-year surrender charge periods expired as investors looked to either reinvest in another tax-deferred annuity or move money into other investments buoyed by the robust stock market.
Fourth quarter fixed annuity sales dropped 13 percent to $25.7 billion as interest rates remained low.
Distributors also faced some uncertainty in the wake of the surprise November election and new rules governing the sale of advice and retirement products into retirement accounts.
In the fourth quarter, compared to the year-ago period, fixed rate deferred annuity sales fell 9 percent to $7.7 billion, fixed indexed annuities fell 13 percent to $14 billion, deferred income annuities fell 30 percent to $580 million and fixed immediate annuities fell 23 percent to $2 million, LIMRA SRI also reported.
Fixed annuities hit their previous record in 2009 with sales of $110.6 billion.
FIAs Also Break Record
Sales of fixed indexed annuities (FIAs), which have been a marketplace favorite over the past few years, rose 12 percent to a record $60.9 billion in 2016, LIMRA SRI also reported.
Since FIAs were placed under the Best Interest Contract Exemption by Department of Labor regulators last April, FIAs have seen quarterly declines, but that still wasn’t enough to prevent them from turning in a record sales year.
“This marks the ninth consecutive year of growth for FIAs,” Giesing said.
Of all fixed annuities, FIAs offer investors among the most creative and innovative product designs, which has helped power the category’s sales.
“Benefits (of FIAs) are just stronger than on the variable annuity side,” Giesing said in an interview.
Deferred income annuity (DIA) sales rose 4 percent to $2.8 billion in 2016 and until interest rates rise, consumers are going to prefer liquidity and flexibility over the guaranteed income that DIAs can offer, Giesing said.
In the low interest rate environment the difference between what DIAs can offer in the form of lifetime income and other withdrawal benefits isn’t as enticing as what investors can get from another annuity products.
But as interest rates rise, investors will see more value in DIAs, he said.
VAs Drop Below 50 Percent Share
Variable annuity sales in 2016 declined 21 percent to $104.7 billion as some insurers pulled back on sales and trimmed benefits, LIMRA SRI reported.
Fourth quarter variable annuity sales were $25.3 billion, a drop of 20 percent compared with the year-ago quarter.
Morningstar estimated 2016 variable annuity sales to be around $100 billion with about $21 billion of that generated in the fourth quarter, according to Kevin Loffredi, Morningstar's senior product manager for Annuity Solutions.
A $100 billion sales year would represent a drop of about 23 percent from the $130.4 billion in variable annuities sold in 2015, according to Morningstar data.
Not long ago, variable annuity market share was approaching 70 percent of all annuity sales and it is “the first time in a long time” that variable annuities have dropped below 50 percent in annuity market share, Giesing said.
Last year, fixed annuity sales came to $117.4 billion while sales of their variable annuity cousins came in at $104.7 billion.
The slow and steady decline of variable annuity sales isn’t a complete surprise as insurance companies cut their variable annuity exposures by “managing down” product sales by removing generous living benefits that variable annuities once offered.
Department of Labor regulations designed to raise standards of advice into retirement accounts have also made it more difficult to sell variable annuities.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]