New year could bring a boon for annuities

Higher taxes may drive interest in variable and indexed annuities; potential of rising rates could inspire new products

By Darla Mercado

Dec 23, 2013 @ 12:31 pm (Updated 4:43 pm) EST

annuities, interest rates, taxes

Next year could be a big one for variable and indexed annuities, both in terms of sales and product development, as new tax and interest rate realities sink in.

This year set what appeared to be a perfect backdrop for annuity sales and development, with the S&P 500 up 28.16% year-to-date through Dec. 23. Interest rates, meanwhile, experienced a spike during May and June – which bodes well for product development – but the Federal Reserve has indicated it will keep its benchmark interest rate low, particularly if projected inflation remains below its 2% goal. Low rates make indexed annuities appear attractive compared with other interest-rate-based products, such as certificates of deposit.

Sales for 2013, however, tell a slightly different story. Variable annuity sales were relatively flat throughout the year: $34.2 billion in the first quarter, $36.9 billion in the second and $34.7 billion in the third, according to Morningstar Inc. Meanwhile, indexed annuities steadily climbed: $7.8 billion in sales during the first quarter, $9.2 billion in the second and $10 billion in the third, according to data from annuities and insurance research company Wink Inc.

Expect to see greater interest from clients in annuities of both varieties as they grasp the reality of larger tax bills come April.

“The tail winds are with variable annuities because of the shift in [capital gains] tax rates,” said John McCarthy, product manager of annuity solutions at Morningstar.

Going into 2014, expect a more bifurcated variable annuity market, wherein clients can either prioritize investing for big gains or they can seek lifetime income – but not both.

“Jackson National [Life Insurance Co.] is the pioneer in promoting variable annuities without living benefits,” said Kenneth P. Mungan, financial risk management practice leader at Milliman Inc. “They showed that advisers and clients see real value in that offering.”

Jackson, now the biggest seller of variable annuities, sold $15.5 billion during the first nine months of the year, with about $3 billion of that coming from its Elite Access variable annuity without living benefits. Meanwhile, Jefferson National, a longtime seller of variable annuities without living benefits, this month added 23 new investment options, bringing its total to nearly 400 funds.

As far as variable annuities for income benefits, look for more risk-managed investment options within annuities, either in the form of managed-volatility funds or asset transfer programs.

Mr. Mungan noted that this year's rising market won't deter the use of products with risk-managed funds – which temper market declines but limit sharp increases. “The retirement-oriented investor isn't sitting fully allocated to equities today,” he said. “Everyone focuses on the headline number of market performance, but for retirement-oriented investors, that's not tuned in to their needs.”

He added that since these retirement-focused clients prefer seeing steady account balances, managed-volatility funds could also be a welcome addition to variable annuities without living benefits.

On the indexed-annuity front, Sheryl Moore, chief executive of Wink, predicts seeing more companies enter the space and greater traction for indexed annuities among banks and wirehouses.

Indeed, Allianz Life Insurance Co. of North America is already a significant player among the indexed-annuity set and has launched a line of products just for broker-dealers and wirehouses. Shorter durations within the five- to seven-year range tend to be the norm for indexed annuities sold in the wirehouse and broker-dealer channels.

Banks and wirehouses are gradually picking up more sales of indexed annuities, too. Ms. Moore noted that in the third quarter of 2012, independent agents accounted for 90% of sales, while banks made up 7% and wirehouses represented 1%. A year later, independent agents made up 80% of sales, while banks accounted for 11% and wirehouses 2.5%.

“If rates stay low, indexed annuities are a great alternative [to certificates of deposit] for those bank reps,” Ms. Moore said. She projected overall indexed annuity sales for 2014 to hit $37.8 billion. Year-to-date through the third quarter, those sales were at $27.1 billion. “We're seeing a drive of sales through banks, registered reps and wirehouses, and that will continue to escalate as nontraditional insurers [those that are new to the indexed-annuity business] get into the market,” she said.

On the product development front, Ms. Moore predicted that carriers will ramp up their living benefits, adding fancier features such as payment checks that can increase based on interest rates. Development in guaranteed-minimum death benefits will also pick up, albeit slowly. “The low-interest-rate environment isn't conducive to pricing on those benefits, but we will probably see more of those features as rates pop up,” she said.