The second-quarter sales rebound in fixed indexed annuities (FIAs) and the delay of the Department of Labor’s (DOL’s) fiduciary rule mean we could see a sales frenzy during the last half of the year.
But will FIAs top last year’s $58 billion record?
“The DOL rule is on hold, and my response to that is ‘game on’ for FIA sales,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of Wink’s Sales & Market Report.
“The last two quarters are likely to be much better than the first two,” she said. “Will it beat last year’s sales? Probably not, but it will be close.”
Second-quarter FIA sales rebounded 13 percent to $14.6 billion compared with the first quarter, though FIA sales were still down nearly 6 percent when compared to the year-ago quarter, Wink reported.
Some insurers sweetened FIA features, and that helped spur sales in the second quarter, but “we still have work to do to get FIAs back on track,” Moore said.
FIA gains in the second quarter over the first quarter this year outpaced the quarter-over-quarter sales increases in each of the preceding two years, according to SunTrust Robinson Humphrey analyst Mark Hughes.
Overall, FIAs seem to be recovering in the wake of the first phase of the DOL rule taking effect June 9, he wrote in a second-quarter sector update to clients.
But interest rate volatility may also be keeping cash on the sidelines waiting for higher future yields, Hughes wrote.
Uncertainty surrounding the fiduciary rule and a rising stock market has dampened the appeal of fixed annuities and other “safe money” products, Hughes wrote.
Some Uncertainty Swept Aside
Some of the fog surrounding the DOL rule lifted this week with the announcement that phase two of the rule would be delayed until July 1, 2019.
The delay is a win for the financial services industry, as the effective date of the most punitive measures in the rule is pushed back.
“It’s going to be interesting to see what exactly happens given more clarity and compliance as far as annuities are concerned,” said Bill Shelow, president and CEO of LifeMark Partners, an independent marketing organization.
“There’s a chance that the numbers will bounce back,” he added.
In 2016, indexed annuity sales rose 10 percent to a record $58.2 billion compared with 2015, Wink reported.
Insurers and distributors are still adjusting systems and procedures to comply with key elements of the fiduciary rule. Of all the fixed annuity market segments, indexed products hold the most promise for a robust second half.
Without a doubt, FIAs were granted a major reprieve with the delay in the DOL rule and may yet surprise the industry with another record year in 2017.
Long-Term Sales Prognosis Is Strong
Although some annuity sales numbers are fluctuating wildly, analysts say the long-term prognosis for annuity products remains very strong.
Like power changing hands from one political party to another, the money in the annuity world sloshes about between the variable and fixed buckets and back again, analysts say. Some numbers look bad, but can be misleading in the big picture.
“People keep saying there’s a big downturn, a big downturn, a big downturn, but I don’t see it,” said Jeremy Alexander, president of Beacon Research, a provider of annuity data. “I think it’s a strong market.”
The tax-deferred nature of annuities renders them “sticky,” like money staying within the family, so it’s not as if banking products are stealing annuities’ thunder, he explained.
Consternation around the lowest first-half sales numbers in 16 years doesn’t seem to bother Alexander. He noted that fixed and variable sales collectively have remained in the $200 billion to $250 billion range for many years.
“In the long term, it will not really matter, but it does cause turbulence in how some folks respond,” said Tamiko Toland, product research manager for Cannex, an annuity pricing information exchange, and a longtime observer of the variable market.
Besides, insurance company executives continually remind shareholders that demographic trends favor the annuity marketplace.
Americans live longer than they used to and tens of millions of them find themselves in the hunt for guaranteed income to make up for disappearing pensions, underfunded retirement accounts and the jitters surrounding the survival of Social Security.
Fixed Annuities Take the Lead
These days, fixed annuities are making a meal of their variable annuity cousins as they steadily eat into the VA market share.
But while the balance of power has swung in favor of fixed annuities, it represents natural oscillation within an annuity market that has maintained overall sales of between $220 billion and $240 billion over the past five years.
Last year, for the first time in a long time, fixed annuities ($117 billion) outsold VAs ($104 billion), according to LIMRA Secure Retirement Institute. That represented a record year for fixed annuities.
This year, fixed annuities appear to be keeping a similar pace, according to first-half numbers.
Fixed annuity sales came to $56.7 billion in the first half, a 54 percent share, while variable annuities sold $49.1 billion, for a 46 percent share.
What a difference a half-decade makes.
In 2012, fixed annuity sales finished the year with $72.3 billion in sales, but variable annuities more than doubled that figure with $147.2 billion in sales.
Volatility, Yes. Death Spiral? No
Despite the long-term stability of the annuity market, there has been plenty of short-term volatility, data show.
And there is no shortage of reasons: fiduciary regulations, rising interest rates, investment restrictions in the variable annuity space, a block of fixed-rate deferred annuities coming due in the first half of last year, and insurers “managing down” their variable annuity portfolios.
The upshot has sent the annuity market sideways as subsegments rise one quarter and fall the next, or as niches rise even as an overall annuity segment shrinks.
“We’ve had a lot of volatility around expectations [from] DOL. When you look at the movement and take a step back, that’s what it is,” Toland said.
One of the fixed annuity segments on the receiving end of that volatility has been indexed products.
Indexed annuities finished last year with a record $61 billion in sales, a 12 percent increase from 2015. This year, those products saw first-quarter sales drop 13 percent to $14 billion before rebounding with nearly $16 billion in second-quarter sales.
In the spring, after the release of first-quarter sales, analysts doubted that 2017 would turn into a record year for indexed annuities.
But, as Moore said earlier, it’s “game on” for the indexed segment in the second half of the year.
Last year, the annuity industry was gearing up to implement the fiduciary rule, resigned to the fact that a Hillary Clinton White House would push to regulate the financial services sector even further.
Instead, the industry awoke to find a new president calling for a moratorium on Obama-era financial regulation, and now major parts of the fiduciary rule are not expected to be implemented until next year.
No wonder the annuity market is suffering from a severe case of whiplash.