Fixed annuities were smoking in second quarter. Smoking hot, that is. According to the latest individual annuity sales estimates from LIMRA Secure Retirement Institute (LIMRA SRI), total fixed annuity sales hit $25.2 billion in second quarter, up 34 percent from the same period last year.
For the first half, fixed sales totaled $49.1 billion, up 39 percent for the same period last year.
Variable annuities did not fare as well in terms of growth. Those sales fell 5 percent in second quarter compared with last year on sales of $36.2 billion. On a first-half basis, they fell 4 percent on sales of $70.4 billion compared with last year, according to LIMRA SRI.
The results for both annuity sectors echoed those of first quarter. That’s when fixed sales rose by a stunning 43 percent over the same year earlier quarter on sales of $23.5 billion, while variable annuities fell by 3 percent on sales of $34.2 billion.
A New Annuity Dynamic
The performance in both product lines brings to the foreground what may be a leading dynamic in the annuity business – a dynamic forged by retirement demographics.
Time was when fixed annuities made their strongest gains when interest rates were high or rising and that variable annuities soared when the stock market was making big gains. Yet that was not the case this year.
In both second and first quarter, fixed annuity sales climbed higher and higher even though interest rates did not go up. In fact, interest rates fell. For example, the 10-year bond rate dropped from 3 percent at year-end 2013 to not quite 2.6 percent at the end of second quarter. Similarly, variable annuities declined even though the stock market reached new highs in both quarters. (The Dow closed second quarter at 16,851, yet another new high.)
The throng of the eldest baby boomers, now in their late 50s and early- to mid-60s, may account for much of the fixed annuity gain this year. Industry research shows that those who are at or near retirement are more interested in financial products with guarantees than with the opportunity to reap big gains in the stock market (absent of guarantees).
Other factors were also at work in both sectors. These include the continued downsizing of variable annuity production by some carriers, the debut of new derisked variable annuities by other carriers that some sales agents deemed as unattractive, the proliferation of a wide assortment of fixed products geared for today’s market and a generally more optimistic business environment this year.
But those factors are in addition to the impact of rising demand for guarantees among older buyers, especially older boomer buyers. For example, in an Allianz Life survey last year, 87 percent of boomers age 55 to 65 indicated they felt more attracted to a financial product with 4 percent guaranteed return than a product offering an 8 percent return that could lose value due to market downturns.
On a dollar comparison basis, variable annuities did outperform fixed annuities in second quarter, as per usual. However, the performance gap between variable and fixed has narrowed.
For instance, in second quarter 2014, variable policies sold $36.2 billion versus the $25.2 billion sold in fixed policies, according to LIMRA SRI numbers. That made for a gap of $11 billion. By contrast, in second quarter last year, the gap was $19.2 billion ($38 billion for variable versus $18.8 billion for fixed). And in second quarter 2008, before the Great Recession hit its nadir, the gap was $16.4 billion ($42.2 billion for variable versus $25.8 billion for fixed).
Many producers have been accustomed to identifying themselves as fixed or variable annuity specialists. But this contraction of the sales gap between fixed and variable may, if it continues, spur identification simply as annuity professionals, especially if dual licensed, without regard to annuity type. Such a shift could minimize old rivalries between the two groups, with neither one claiming to have the best, most flexible, nor most suitable annuity solution for annuity-buying customers.
So, what are the totals? According to LIMRA SRI, the total annuity production for second quarter 2014 came to $61.4 billion, up 8 percent from the $58.8 produced in second quarter last year. “This is only the second time we have seen quarterly sales over $60 billion since the third quarter of 2011,” Todd Giesing, LIMRA SRI senior analyst, said in a statement.
Total annuity sales increased on a year-over-year basis too, by 10 percent to $119.5 billion from the same period last year, according to the report.
Fixed Annuity Insight
The LIMRA SRI data provide plenty of insight into which types of fixed products were top sellers in second quarter. Measured by growth, the big winner was the fixed index annuity (FIA) product line.
Those sales jumped 40 percent over the same period last year, set a new quarterly record of $13 billion and won a 52 percent share of total sales, the researcher said.
On a first-half basis, the FIA results followed a similar upward trajectory. FIA year-to-date production grew to $24.3 billion, a 41 percent increase over first half last year, according to LIMRA SRI.
By way of comparison, in second quarter 2008, FIA sales came to just $6.9 billion, according to LIMRA figures. The star-shine in that quarter, on the fixed side of the business, was fixed deferred annuities, which sold $22.3 billion. Now the tables have turned. Fixed-rate deferred annuities (book value and market value adjusted) produced only $7.4 billion second quarter this year – nearly half the $13 billion reported for FIAs in the same quarter.
Industry proponents take the steady growth of FIAs as a signal that the policies are attracting buyers who want upside potential with downside guarantees. They have reason – many FIA buyers are boomers. In first quarter 2014, for instance, Wink Inc. reported that the average age of FIA buyers was 64.
Other figures in the LIMRA SRI sales report reinforce the notion that fixed annuity sales are trending toward boomers with an eye on retirement income guarantees. For example:
» Deferred income annuity (DIA) sales reached $710 million, up 33 percent from second quarter in the prior year. On a first-half basis, DIA sales hit $1.3 billion, up by 43 percent from last year.
» Single-premium immediate annuity sales rose 37 percent to $2.6 billion, and not just from one carrier. On a first-half basis, these sales reached $5.1 billion, up 42 percent year over year.
» Guaranteed living benefit features, when available, were elected on 72 percent of FIA sales.
The Top Annuity Carriers
Worth noting is that the carriers taking first place in all three categories in second quarter 2014 outperformed the second-place carriers by substantial sales margins.
For example, in the total annuity production category, Jackson National sold nearly $13.5 billion for the quarter, while second-place AIG sold $9.3 billion. In the variable annuity category, Jackson sold $12.7 billion while second-place Lincoln Financial Group sold $6.4 billion. In the fixed annuity category, Allianz Life sold $6.6 billion, while New York Life came in second on sales of $3.5 billion.
Wide spreads among annuity-sales leaders have occurred in other quarters, too. However, more often than not, the differential between top sellers and their closest contender has tended to be narrower, somewhere around $2 billion in less competitive eras and even under $1 billion in more competitive environments. Also, when there is a big gap, it’s often in one category and rarely in all three.
Whether the current gap in all three categories signals a market dominance that will impact the industry in the months ahead is a story yet to unfold. But producers will surely start looking over the product portfolios of the current leaders to see what ideas or messages they can discern.