Variable Annuities, Down But Not Dead

Variable annuity sales in 2017 fell 10 percent and are down 50 percent compared to a decade ago but there’s reason to be more hopeful in 2018, a Morningstar expert said.

“It looks like some of the underlying factors are moving in a direction that would indicate more VA sales,” said John McCarthy, senior product manager for Morningstar in Chicago.

Among the underlying factors that represent a tailwind for variable annuity sales:

• Rising interest rates.
• The Federal Reserve’s intention to raise benchmark lending rates still further this year.
• The invalidation of the DOL’s fiduciary rule, which made it more difficult for advisors to justify the sale of a VA.

Variable annuities’ contractual guarantees are linked to interest rates in the market and the higher rates rise, the richer the living withdrawal benefit.

“The higher the interest rates, the higher the lifetime guarantees they can offer,” McCarthy said.

Every top 10 VA seller saw fourth quarter sales increase from the third quarter, a further sign of market strengthening, Morningstar reported.

Fourth quarter sales rose 14 percent to $24 billion over the third quarter, Morningstar reported.

Year-end 2017 sales were $90.3 billion compared with $101 billion in 2016, Morningstar reported.

Product Development

Product development last year was muted as low interest rates made it difficult for companies to tweak lifetime guarantee withdrawals, step up benefits and the adjust fees charged by insurers.

“With rates so low, there’s a ceiling on what they can do,” McCarthy said.

Insurers filed dozens of new fee-based VAs last year in an effort to attract a broader set of distributors – fee-based registered financial advisors, for instance.

But traction is slow and fee-based VAs are still only a sliver of overall VA sales, which are overwhelmingly sold via commission.

Buffered, or index-linked, VAs also represented a bright spot for sales last year.

Despite a dearth of product breakthroughs, “VA’s aren’t disappearing,” McCarthy said. “They’ll never go away.”

Last year, fixed annuities tended to be the beneficiaries of product tweaks and it will be “interesting to watch” to see if product development shifts back to VAs in 2018, he said.

Top Player Snapshot

Jackson, TIAA-CREF and AXA continue to remain the top three issuing companies for new sales in the fourth quarter and all of 2017, Morningstar said.

Jackson earned annual new sales of $4.5 billion, TIAA-CREF generated new sales of $3.1 billion and AXA gained $2.3 billion in new sales, Morningstar reported.

The best-selling individual VA contracts last year were Jackson’s Perspective II (7-year), TIAA-CREF’s Retirement & Supplemental Retirement Annuity R1, and Ameriprise’s RVS RA VA5 Advantage (10-year), Morningstar reported.

The top insurance sellers through the independent channel in the fourth quarter were Jackson, Lincoln, Prudential, AXA and AIG, Morningstar reported.

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

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