Why MYGAs are enjoying a renaissance

It’s the golden age of MYGAs, one annuity expert declared, as sales of multi-year guaranteed annuities more than doubled between 2021 and 2022.

A recent webinar by the National Association for Fixed Annuities delved into the reasons why MYGAs are reaping the benefits of what another expert called “a perfect storm” that combined a record-breaking drop in the bond market and the worst equity performance since 2008 with a rising interest rate environment.

Multi-year guaranteed annuity sales in the fourth quarter were $35.5 billion, Wink Inc. reported last week. Sales were up 29.6% when compared to the previous quarter, and up 216.8% when compared to the same period, last year. MYGAs have a fixed rate guaranteed for more than one year. Total 2022 MYGA sales were $103.7 billion, an increase of 105.5% from the previous year. This quarter and this year are the greatest MYGA sales have been since Wink began tracking sales of the products in 2015.

“We’re excited for the future of this industry,” said Ryan Lex, executive vice president and chief distribution officer at Ibexis. “What we saw in 2022 was nothing short of amazing. The entire annuity space right now is on fire in a good way.”

Lex said a number of factors contributed to high sales of fixed annuities, including MYGAs.

“We saw market volatility and uncertainty in tax policy have driven a number of customers to look at fixed annuities as a solution inside their portfolio,” he said.

Why the bump in sales?

Lex noted that 2022 saw the worst bond market in history, the worst combined stock and bond performance since 1872,  and the worst equity performance since 2008.

“You take that perfect storm and combine it with a rising rate environment and look at the 5-year CD average, the fed funds rate and 5-year MYGA average, and you see that the MYGA rate and the CD average and the Fed fund rate are juts about even.

“But what can you get from an annuity product? You can get enhanced liquidity, you can get a death benefit,” he continued. “If you’re looking for principal protection and you have an underlying guarantee of X where you’re not going to beat that X and if you decide to leverage some of your money and put it in this Y bucket and you can do better – why wouldn’t you if you’re a consumer who maybe has some money in cash and you want to learn some level of interest that will beat the bank or a CD or money market?”

Lex said it’s easier for an advisor to position that reasoning as opposed to telling a client, “Let’s take X amount of your dollars. We’re going to essentially lock it up in some sense. You’re not going to have the same level of liquidity for X number of years, and we’re betting on the ‘what if’ of an index or some lever out there that the insurance company controls.

“This story is much simpler, it’s much easier for the consumer to understand. Given where rates are, I think the average person understands the value of these products.”

How MYGAs have evolved

The past year has been an exciting year for MYGAs, said Bobby Samuelson, president of Life Innovators. As interest rates continue to rise, MYGAs become more popular with investors.

He cited three main ways in which MYGAs have changed over the past year.

1. More sophisticated underlying investment strategies.
2. More differentiation between product features.
3. Unique and innovative MYGA designs.

Looking at Moody’s seasoned Baa corporate bond yield, Samuelson pointed out that rates year over year have risen dramatically. As corporate bond yields go up, MYGA rates have gone up as well. A bond yield of 5.5% is competitive with MYGA rates, he said.

“The fact that MYGAs kept pace with corporate bonds, and did it at a guaranteed rate with no principal risk, is pretty wild,” he said. “So what I think is kind of the secret sauce is that carriers have become a lot more sophisticated in how they invest these assets and those assets allowed them to take advantage of a rising rate environment.”

But what Samuelson called “the big story” with rising MYGA sales in 2022 “was not just that rates went up and MYGAs stayed with it. It’s that when you buy a MYGA, you’re getting institutional access to complex structured securities that offer better return for the same credit risk through the wrapper of a MYGA.

“In other words, life insurance companies are a lot more sophisticated about how they invest their assets these days, and the benefits of that flow back through to buyers of MYGAs, and we saw that loud and clear in 2022 when MYGAs kept pace with corporate bonds.”

MYGA design differentiation

Carriers that offer MYGAs have carved out some differentiation among their products. Samuelson gave a rundown.

1. Fee for liquidity. The life insurer reduces the guaranteed interest rate by 5-30 basis points in order to have free withdrawals and other liquidity provisions. The company can offer a higher top-line rate because they don’t have to include the cost of liquidity.
2. Surrender charge waivers. The life insurer provides a waver of surrender charges under certain conditions primarily related to long-term care needs. The cash value can be liquid and accessible in the event of an LTC need.
3. Simple interest. The life insurer pays interest based on premium minus withdrawals instead of on the accumulated value. This is more advantageous if the annuity holder is taking withdrawals and it produces a higher death benefit in all years.
4. Indexed returns. The life insurer guarantees the coupon rate for the terms of the contract. The index performance determines whether the coupon is paid. A higher indexed coupon coupled with positive index performance could result in higher returns than in a traditional MYGA.
5. Ultra-short contracts. Policies designed for durations of 0-3 years to take advantage of the current inverted yield curve. These can provide a powerful combination of yield, liquidity and optionality with the ability to renew into subsequent guaranteed terms.
6. Floating rate. The contract guarantees a base crediting rate but stacks on additional credit based on interest rates on top. This allows for base MYGA returns with exposure to movement in interest rates, giving clients both rate security and upside potential.

“It’s a great time to be in the MYGA space,” he said.

Getting a foot in the door

Advisors are harnessing the features of MYGAs to “to give consumers a bigger bang for their buck,” Lex said.

“When you think about the last 15 years and where rates have been, it’s like we’ve been in the Dark Ages for the fixed annuity world and now we’re coming into the Industrial Revolution or the Renaissance period where product development teams are coming up different triggers and different widgets, different levers.”

The MYGA discussion “is a good way for an advisor to get a foot in the door,” Lex said.

“They’re offering contractual guarantees from a carrier that has a good rating and they get a foot in the door and from there they can talk about a bigger, longer retirement income plan with their prospects and clients.”

Where will things go in 2023?

The future of the MYGA market depends on whether interest rates remain high, Samuelson said.

“If oxygen is what MYGAs breathe, then the air is still good. There’s a lot of oxygen out there, there’s a lot of rate out there,” he said.

“I see tailwinds on the rate side, I see tailwinds on the product side, I see tailwinds for new entrants getting in to the space. I think we will see more inventory, more products, continued strong rates.

“For any agent out there, this is the golden age of MYGAs right now.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].