Index Annuities Poised To Steal The Spotlight From Variable Annuities

By Cyril Tuohy

Sales of fast-growing index annuities could eat into the VA market’s recovery, a Morningstar analyst said recently.

Regulatory relief and the Trump administration have provided a welcome tailwind for VA sales, which finally ended their long sales slide with a slight sales uptick in the second quarter.

But now the looming issue for VAs is competition from the index annuity market segment, said Michael Manetta, senior quantitative analyst with Morningstar.

“VA s are still outselling index annuities but index annuities are growing much faster,” Manetta said. “That's challenging going forward for VAs and that may cap the rebound of VA sales.”

VA sales inched up in the second quarter to $23.6 billion, from $23.2 billion in the year-ago period, the first time VA sales rose year-over-year in the past four years, Morningstar reported.

Index annuity sales, meanwhile, climbed 17 percent to $17.6 billion in the second quarter over the year-ago period, LIMRA Secure Retirement Institute data showed.

A decade or more ago, linking the VA benefit base to the market held strong appeal. But with more people turning risk averse, a guaranteed floor linked to the market – which index annuities offer – is likely to prove more attractive these days, Manetta said.

VAs are on track for sales in the $100 billion range this year, flat compared to last year, LIMRA analysts have said.

Index annuities are expected to turn in record sales this year, cresting $62 billion, said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of Wink’s Sales & Market Report.

“I agree – index annuities are the biggest threat to VAs,” said Moore. “If you ask me, index annuity sales are going to overcome variable annuity sales soon.”

Moore is projecting sales of index annuities sales to be $62.3 billion for 2018.

Same Insurers In Both Segments

While index annuities may turn out to be VAs’ biggest long-term challenge, if the same companies are selling both types of products, then the insurer isn’t likely to suffer in terms of overall sales.

But if upstarts begin to sell index annuities and eat into VA sales traditionally sold by legacy insurers, look out, Manetta said.

Manetta sees some parallels with the mortgage market, where lenders like Quicken Loans were able to establish a foothold in a market dominated by traditional mortgage lenders.

“It will be interesting to see who the big players are in the index annuity space and if they are different from the ones in the VA space,” Manetta said. “That might be an interesting dynamic.”

At the moment, the VA market appears to have stabilized but whether it could decline still further is difficult to say, Manetta said.

The VA sales decline was already slowing and there’s little reason to believe the decline would have continued much further. Still, the days when VAs were selling $40 billion a quarter aren’t going to come back anytime soon.

Independent Channel Racks up Gains

Independent advisors also cooked up big market share gains in the distribution of VAs, the Morningstar analyst said.

Independent advisors accounted for more than 42 percent of all VA sales in the second quarter, up from 36 percent in the year-ago period.

Much of the gains came at the expense of the captive agency channel, which saw its market share plummet to less than 30 percent in the second quarter compared with 37 percent in the year-ago period, the data show.

Older VA contracts seem to be selling better than more recent contracts and independent advisors may be more comfortable selling contracts dating from 2012-13 rather than contracts from 2017-18, Manetta said.

Another reason for independent advisors increasing their market share could be due to the surge in the numbers of people retiring or nearing retirement, and people relying on independent advisors to service those retirement portfolios, he said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].