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Fixed Annuities Had a Strong 2016 Despite Soft Third Quarter

Is the third quarter’s fixed annuity sluggishness a sign of the market’s direction or just a blip on an ascending arc?

It is too early to make a trend out of a single quarter, but sales overall have been looking strong for many preceding quarters.

Even with the third quarter’s results, over the nine-month period ending Sept. 30, sales still rose to $91.5 billion, a 25 percent increase over the previous year, according to industry tracker LIMRA Secure Retirement Institute.

There’s even more good news: Year-end sales of fixed annuities are expected to surpass last year’s sales of $104 billion by as much as 20 percent, LIMRA also reported.

For the nine-month period ending Sept. 30, fixed rate deferred annuities were up 38 percent to $31 billion,book value annuities were up 21 percent to $17 billion, and market value adjusted annuities soared 70 percent to $14 billion.

In addition, fixed indexed annuities rose 22 percent to $47 billion; fixed deferred annuities were up 28 percent to $78 billion; deferred income annuities increased 19 percent to $2.2 billion; fixed immediate annuities shot up 11 percent to $7.2 billion; and structured settlements inched up 2 percent to $4.2 billion, LIMRA reported.

Good news all around for the fixed world.

“The bigger story is that even with a big decrease in the third quarter, the year-to-date sales are still ahead of 2015, and that’s up 25 percent,” said analyst Scott Hawkins, a director of insurance research at Conning in Hartford.

The Third Quarter

But what about the “smaller story” around third-quarter sales?

After roaring along during the second quarter with sales of $31.5 billion, fixed annuities hit the brakes in the third quarter when sales dipped to $27.7 billion, an increase of just 1 percent over the third quarter of 2015, LIMRA SRI data indicate.

Wink’s Sales & Market Report, another industry data tracker based in Pleasant Hill, Iowa, reported third-quarter traditional fixed annuity sales down by as much as 59 percent to $1.2 billion compared with the year-ago quarter.

FIA sales were down nearly 24 percent compared to the second quarter, Wink also said. (The company measures a narrower group of fixed annuity companies compared to LIMRA.)

Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., in a news release called fixed annuity sales “sluggish.”

Of the eight fixed annuity product categories tracked by LIMRA, four of them turned negative in the third quarter.


What Happened?

The 10-year Treasury hit a record low during the third quarter, which took a toll on pricing for fixed-rate deferred, indexed and income annuities, said Todd Giesing, assistant research director for LIMRA SRI. had June rates for five-year fixed annuities dropping from 1.61 percent to 1.48 percent, and the decline in crediting rates has meant a corresponding decline in sales, analysts said.

“Lower crediting rates reflected the continued pressure on insurers’ investment portfolios from the prolonged low-interest rate environment,” said Scott Hawkins, director of insurance research with Conning. “Insurers need to adjust crediting rates to maintain product pricing margins.”

Moore agreed that the rates helped depress sales.

“Several companies had big drops in their fixed annuity sales this quarter,” Moore said, “Five of the top seven sellers had double-digit declines. This is primarily a result of rate reductions to their annuities. Whenever there are reductions in interest rates, we see corresponding declines in sales — when it comes to fixed annuities and MYGAs.”

Hawkins also said that with rates on the decline over the summer, deferred income, book value and immediate annuities were in a holding pattern, and advisors may have been asking clients, “You want to buy now or would you prefer to wait until after the election?”

Since the Nov. 8 election, rates have spiked.

Even as rates improve, insurer portfolios will remain under some pressure because insurance companies hold big blocks of bonds bought when rates were decreasing, and it will take some time for the bonds to roll off until they are replaced by higher-yielding bonds, Hawkins said.

Market watchers were also waiting for the Federal Reserve to raise its benchmark lending rate at its December meeting, in the wake of a robust jobs report by the Labor Department.

Jeremy Alexander, president of Beacon Research, an Illinois-based fixed annuity data tracker, said he is seeing unusual growth in a particular product.

For the first time in years, the seven-year-term fixed annuity is rising in popularity, a sign that investors are willing to pay more to go out for a longer term as the yield curve steepens, which is often seen as a sign of stronger economic activity, Alexander said.

Indexed Annuity Sales

Fixed indexed annuities (FIA), long a shining star of the fixed annuity world and which are on pace for a record $60 billion year in 2016, increased only 5 percent with $15 billion in the third quarter compared with the year-ago period,

LIMRA said.

Wink’s Sales & Market Report pegged FIA sales up only 3.2 percent to $14.3 billion in the third quarter compared with the year-ago period.

Analysts pointed to the Department of Labor’s fiduciary rule, which raises standards for investment advice into retirement accounts, as an FIA sales headwind.

In the past, insurance agents and the independent marketing organizations (IMOs) they work with have been responsible for the bulk of FIA sales.

But banks and broker/dealers, which are more tightly regulated, may be taking away some of those sales from the IMOs, analysts said.

“The DOL fiduciary ruling has had tremendous impact on the channel,”

Hawkins said. “IMOs are now at a great disadvantage to banks and broker/dealers.”

Alexander also said that under the DOL rule the easiest way for an insurance company to sell more FIAs is to go through a financial institution such as a bank, a registered investment advisor (RIA) or a broker/dealer — where 60 percent of reps already hold a Series 6 or Series 7 license.

“These channels are so regulated now, so how big of a leap is it for them to go and follow and comply with the DOL? Much less than for nonfinancial institution,” Alexander said.

Alexander said his data showed that FIA sales through independent broker/dealers rose 57 percent to $7 billion in the first three quarters of 2016 over the year-ago period.

Some of that may be DOL-related, but some if it might also be connected to distributors redirecting sales from the falling variable annuity market and into the rising fixed indexed annuity market, Alexander also said.

“There’s been much speculation about the effect of the DOL, and I’m not one to guess, because I’ve seen evidence of a sell-off and I’ve seen evidence of a surge,” Alexander said. “So many people are going out on a limb on this.” 

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] [email protected].

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