Researchers Had To ‘Triple-Check’ Stunning 2Q Annuity Results

By Steven A. Morelli

Annuities boomed in the second quarter with fixed products showing a strong revival after several moribund quarters, according to early second-quarter sales results from the Secure Retirement Institute.

It is no surprise that variable annuities did well with a 55% quarterly increase year-over-year as equities markets grow steadily with less volatility. The offshoot registered index-linked annuities have been incinerating their sales records quarter after quarter, with a blazing 122% quarterly increase over the previous year.

The turnaround in fixed products was a bigger surprise given the sluggishness of the past few quarters. Even the researchers did a triple-take.

“I actually had to triple-check the numbers before we put them out,” said Todd Giesing, assistant vice president, SRI Annuity Research. “We'd have to go all the way back to the fourth quarter of 2008 to see better overall individual annuity sales than we saw here in the second quarter. We looked at it really closely. All categories are up double digits, except for structured settlements.”

Annuity sales were up 39% over the second quarter of last year, which was a particularly low sales quarter because of sudden restrictions imposed as the COVID-19 pandemic unfolded. A significant factor was the lifting of restrictions for social distancing as vaccinations became widely available.

Other factors Giesing cited were general improvements in economic conditions and a slight increase in bond interest rates with the expectation of slow, steady growth in the future.

But Giesing emphasized that the biggest factor was the unleashing of pent-up demand in the first half of this year.

“Advisors were able to get back to work with face-to-face interaction with clients, which would definitely help with the sales volumes of individual annuities as people start to get refocused,” Giesing said. “I look at last year as people losing focus, or shifting focus to obviously shorter-term needs, more on health and family than longer term, planning for retirement. Now that we're kind of getting out of the weeds, hopefully, let's cross our fingers here, we're starting to get back to a sense of normalcy.”

COVID-19 Resurgence

The finger-crossing is necessary because of the resurgence in COVID-19 lately, with some areas requiring masks indoors again. Giesing acknowledged the COVID spike is a concern but even if advisors had to sell virtually again, they and their clients would be more prepared to operate in that environment.

Another fervent hope is that interest rates will continue to increase, but some of the steam has leaked out of that momentum. Even so, annuity rates are more attractive than other options such as certificates of deposit.

But even as interest rates increased slightly, Giesing said researchers had been expecting a slowdown in fixed rate deferred products because they thought the flight to safety that perpetuated previous sales would ease as equity markets and economic conditions stabilized.

“We're continually seeing the lack of alternative solutions, is still driving business to fixed rate deferred,” Giesing said. “We think where we are right now in the second quarter is the peak. We do have some signals and signs that it should start to decline.”

One of the signs is that researchers are seeing is a double-digit decline in pending contracts for fixed-rate deferred, also known as multi-year guaranteed, products.

Pending contracts are looking better for fixed-index annuities, which have been slumping the past few quarters, Giesing said. Registered index annuities had an edge during the past year, which might continue, unless FIAs regain momentum with improving rates. The last time FIAs showed strong sales was 2018, he said, when the 10-year treasury was over 3%.

“In those types of scenarios where interest rates are at higher levels than what we're seeing today, that could swing the value proposition back to FIAs,” Giesing said. “But in the higher equity volatility times and lower interest rate environments, we do tend to see more of the flows going into the RILAs.”

Some of the push in FIA sales has been momentum from some companies getting aggressive with offering attractive rates and conditions to grab market share, but they often have to “come back to Earth” with their pricing at some point, Geising said.

Another push in the flight to safety was news regarding President Joe Biden’s tax plans, which feature a capital gains increase.

'Less Reason To Wait'

Tomiko Toland, CANNEX director of retirement markets, agreed that the tax news was an impetus, but the rise in interest rates was the big driver for fixed product sales. And she added that the interest rate increase does not have to be that large or even that soon for the momentum to continue.

“The longer we expect it to take for interest rates to move back up, the less reason to wait for rates to rise,” Toland said. “The advantage that annuities can have is frankly that they have a longer time horizon and can take advantage of longer-dated instruments with higher rates. We also see a lot of discussions around the investing techniques of the private-equity insurers and their access to higher rates.”

Toland also saw the balance between fixed and variable products as consumer sentiment and behavior change.

“As investors get more optimistic, they lean towards variable annuities — at least this is the traditional relationship," she explained. "It will be interesting to see how things evolve now that we have varying degrees of protection on both income and accumulation. We are really getting into new risk management territory with the expansion of buffer structures in particular.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].