SEC Rule Anxiety Might Suppress Variable Annuity Sales

By Cyril Tuohy

Are VAs entering a deja-vu moment all over again?

Rising interest rates and a strong – if choppy – stock market would signal the all-clear for higher VA sales in the second and third quarters.

But the outlook comes with one caveat: the Securities and Exchange Commission’s Best Interest Regulation.

“Now that the SEC comment period is open, we will go into another kind of wait-and-see period,” said John McCarthy, senior product manager with Morningstar in Chicago. “Against that background, that will be interesting to see what happens with VA sales.”

VAs have been there before.

Last year, as key benchmark lending rates rose and the stock market roared ahead – both good news for VAs – VA sales fell 10 percent to $96 billion over 2016 after partial implementation of the Department of Labor’s fiduciary rule.

The SEC’s comment period for the regulation closes in August, after which regulators could make changes.

But the good news for VAs and people who sell them is that the regulation doesn’t require behavior anywhere near the specific dictates of the DOL fiduciary rule.

In March the courts vacated the fiduciary rule, effectively killing it for good.

Broker-Dealer Approaches

Another question surrounding VAs is the approach that broker-dealers expect to take with regard to a best interest perspective, McCarthy said.

Firms that take a holistic view of how a VA fits into a client’s overall retirement portfolio are likely to consider a VA sale cautiously and apply a battery of forecasting models and portfolio simulations, he said. Other firms may treat VAs as a single product seen through the lens of single-product illustration, but that still meets suitability standards required of regulators.

Still, a consensus has emerged among industry analysts that VA sales have most likely bottomed out.

New VA product introductions, higher crediting rates for guaranteed living benefit products, and the loosening of investment restrictions bode well for future VA sales. Segments of the VA market such as index-linked and fee-based VAs are selling very well, though from a much smaller base.

Sales Flat

First-quarter sales were the second-lowest quarterly sales total going back to 1999, Morningstar reported.

First-quarter VA sales were $22.4 billion, down a hair from the $23 billion sold in the year-ago period and down from $23.4 billion in the fourth quarter.

The fact that VA sales held the line was considered a victory for a product category in steady decline, but flat sales mean VAs still need all the help they can get.

Sales, which were forecasted to fall by 5 percent this year, are instead poised to rise by 5 percent this year, according to the latest forecast from LIMRA Secure Retirement Institute.

The quarterly highwater mark for VA sales was $47 billion in the fourth quarter of 2007, a time when the 10-year Treasury was yielding above 5 percent.

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

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].