Why FIA Sales Galloped To New Records

By Linda Koco
AnnuityNews

Fixed index annuities put the pedal to the metal in 2013. The major annuity researchers show sales premium for the products ringing in very close to $40 billion, a new record.

In fact, this was the fifth consecutive record-setting year for fixed indexed annuity (FIA) sales, according to Sheryl J. Moore, president and chief executive officer of Wink Inc. Wink has put 2013 fixed indexed annuity (FIA) sales at $38.7 billion, up 13.4 percent from 2012. 

LIMRA Secure Retirement Institute (LIMRA SRI) estimated a somewhat higher total of $39.3 billion — up 16 percent in from the prior year.

And Beacon Research came in a bit higher still, at $39.6 billion, for an increase of about 15.7 percent from the $34.2 billion that Beacon reported for 2012 sales. 

Why did FIAs gallop?

By whichever number measured, the double-digit growth occurred in the same year when another type of annuity, the variable annuity, saw sales drop by 1.5 percent. The contrast in growth outcome makes the FIA upward trajectory all the more fascinating. Why did FIAs gallop ahead?

For the sake of perspective, variable annuity sales still far overshadowed those of FIAs. Morningstar reported that variables sold $142.8 billion in 2013, for instance, a few billion down from the $145 billion sold in 2012. Still, FIAs represented 50 percent of all fixed annuity sales in fourth quarter 2013, according to Beacon, and they have hovered around this percentage all year. This makes FIAs a very significant part of the fixed annuity marketplace.

So how did they reach a new record in sales? It didn’t happen in a vacuum. Data and commentary from all three research firms indicates that several factors contributed.

One trend was the overall climate for fixed sales. Beacon president Jeremy Alexander pointed out that the entire fixed annuity industry — not just the indexed sector — “had its best year since 2009.”

For the year, fixed annuity sales totaled $78.1 billion industrywide, up 16.6 percent from $67 billion in 2012, Beacon reported. In the LIMRA SRI data, the sales were up 17 percent from 2012 on total fixed annuity premium of $84.8 billion.

A chief driver for that growth was the rising interest rate environment. In 2013, average credited rates for fixed annuity products increased by 40 basis points, Alexander said.  

In early December, the Fisher Annuity Index reported the average rate for all fixed annuities in its database at 2.87 percent, and the high norm was 4.75 percent. Twelve months previous, the average rate was 2.48 percent.

Joe Montminy, assistant vice president at LIMRA SRI Annuity Research, pointed out that the improved rate environment made the fixed annuity offerings more attractive — a point well taken, given that competing products like bank savings accounts and shorter-term bank certificates of deposit were paying under 1 percent.

It may be that the rising-tide-lifts-all-boats phenomenon was at work, helping along the FIA sales as well as sales of other fixed annuity products. “For the first time, there were year-over-year increases in sales of all types of fixed annuities,” Alexander said.

Banks and wirehouses

So was the if-you-can’t-beat-em-join-em mentality, at least in the banks and maybe the wirehouses.

Wink’s numbers show that banks and wirehouses have increased their FIA sales. For example, in fourth quarter 2013, bank sales of the products represented 11.5 percent of all sales for the three-month period, the firm said. That’s up from just 6.5 percent in fourth quarter 2012.

FIA-snipers might say a 11.5 percent share in one quarter is too small to count as significant.  But the growth occurred in a quarter when overall FIA sales rose by 35 percent, to $11.5 billion, from the same year-earlier quarter, according to Wink. This means that, in 2013, the banks took a bigger share of a bigger pie. When that happens in any business, most observers consider the gains to be worthy of competitive analysis — and response.

The growth in banks is significant for another reason, too. Time was when banks sold very little by way of FIAs. For example, in the fourth quarter of 2007, bank share of fixed index annuity sales was 3 percent, and in 2008, it was 4.3 percent, according to Wink reports. But now the bank share is more than double those earlier percentages, signaling greater adoption of the product.

Some FIA professionals believe that the upside growth potential with downside guarantee has become a compelling story for banks to tell. While that is likely the case, the growth in bank sales was probably influenced by other factors, too. These include greater outreach to banks, especially among FIA carriers that use the multi-channel distribution model, plus the possible availability of a premium bonus.

The growth in wirehouse distribution is not as dramatic as in bank distribution. But it’s notable due to the disinterest that wirehouses have shown in FIAs over the years. In fourth quarter 2013, wirehouses took a 2.6 percent market share, up from 1.2 percent in 2012, according to Wink.

That said, independent agents did continue to take the majority of FIA sales last year. Their fourth quarter 2013 share came to nearly 81 percent, according to Wink. That’s very close to the previous quarter’s 82 percent, though down from 87 percent in fourth quarter 2012.

It’s unlikely that those shifts in share signal that independent FIA agents will retreat from this market. For one thing, growth of FIA sales in the banking and independent broker/dealer channels has been organic and additive, and “not at the expense of the independent channel,” according to LIMRA SRI’s Montminy.

For another, the independent channel’s market share shifts by a few points virtually every quarter, but for several years it has remained somewhere in the 80 percent  range in Wink’s numbers. Insurance and financial practitioners are quick to point out that historical performance is no guarantee of future results; however, they can at least be viewed as a benchmark.

Other factors

Some other factors that may have contributed to the FIA sales growth in 2013 include:

• Barclay’s/Lehman. Wink’s data shows that this index-linking option took 11.2 percent of fourth quarter FIA sales in 2013. That’s up from just 0.6 percent in the previous quarter and 0.3 percent in fourth quarter 2012, an interesting development given that the option is available in only a limited number of currently-sold products. By comparison,  the S&P 500 index represented approximately 62 percent of FIA sales in the quarter down from nearly 67 percent in third quarter although the same percentage as in fourth quarter 2012.

• Bigger policies. The average indexed annuity sales premium reported was $83,499 in fourth quarter 2013, according to Wink. That’s down by more than 1 percent from third quarter but up substantially from the average ($69,454) reported in fourth quarter 2012.

• Commissions stayed low. In fact, in fourth quarter 2013, the indexed annuity commission received by the agent averaged 5.58 percent of premium, “the lowest-ever average commission paid to the sales agent,” according to Wink.

• More policies sold. Wink numbers show that overall policy count for fourth quarter 2013 was 103,262, up by more than 18 percent compared to third quarter and up substantially from fourth quarter 2012, when policies sold numbered 85,913.

Other factors, such as new distribution arrangements, product debuts and concepts, also played a role.

Putting it together, more FIAs were sold in 2013 than the previous year at higher face amounts. They were sold in an environment paying lower average commissions. Some sales included a still-rare (for indexed annuities) crediting index (Barclay’s/Lehman). All this happened in an economy with rising interest rates, which helped lift sales of all fixed annuity products including the FIAs.

Linda Koco, MBA, is a contributing editor to Annuity News, specializing in life insurance, annuities and income planning. Linda may be reached at [email protected].

© Entire contents copyright 2014 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].