Indexed annuity sales on pace for record year, as variable annuities take another big hit

Variable annuity sales are headed for their lowest annual sales total in nearly two decades, as broker-dealers embrace indexed annuities and the DOL fiduciary rule looms

Nov 22, 2016 @ 1:29 pm

By Greg Iacurci

Fixed indexed annuity sales are on pace for a record year in 2016 as low interest rates and product features drive their popularity among broker-dealers, and despite headwinds from a new Labor Department investment-advice regulation that will make sales of such products more difficult.

At the same time, variable annuity sales are poised to dip to their lowest level in nearly two decades, continuing in their multi-year slide, according to Limra, an insurance industry group.

Limra projects indexed annuity sales to hit $62 billion by year-end, which would represent growth of roughly 14% over the record $54.5 billion set in 2015.

However, Limra estimates a 21% decrease in variable annuity sales in 2016, to $105 billion from $133 billion last year. That would be the lowest figure since 1998, when variable annuities saw $100 billion in sales.

“When we look at variable annuity sales, we see a majority of them through broker-dealers, and we've really seen the sales tail off on the independent broker-dealers this year,” Todd Geising, assistant research director at the Limra Secure Retirement Institute, said.

Independent broker-dealers are the largest distribution channel for VAs, representing 32% of sales this year through the third quarter.

As independent broker-dealers have pulled back from variable annuities, they've embraced indexed annuities, according to Mr. Geising, who said sales grew 60% in the IBD channel since the start of the year.

Variable annuity sales of $25.9 billion in the third quarter were the lowest quarterly total since 1998. Indexed annuity sales in Q3 were $1 billion off last quarter's record-high of $16.2 billion.

“There's been a shift of business to more competitive products coming out on the indexed space,” Mr. Geising said.

Robert McCommon, director of annuities at Wunderlich Securities Inc., a broker-dealer with 225 registered representatives, has witnessed this dynamic at his firm. Indexed annuity sales represent roughly 40% of the firm's annuity business mix this year, up from around 20-30% over the past few years.

Wunderlich brokers, like those in the broader industry, often use indexed annuities within the fixed-income portion of an investor's portfolio. Some find indexed annuities a more attractive option to bonds and certificates of deposit in the current low-interest-rate environment, due to the possibility of the annuities delivering a higher return if the market performs well.

Brokers have also been turning to indexed annuities for their living-benefit features, which have become competitive with those offered on variable annuities over the years.

Variable annuities have also become less attractive to brokers as many insurers have put certain volatility controls in place on contracts with guaranteed-income riders, diluting their upside potential.

Regulatory concerns around the Department of Labor's fiduciary rule, which raises investment-advice standards in retirement accounts, have also tipped the scales against variable annuities, Mr. Geising said.

Insurance companies have brought few product enhancements to market given their focus on compliance with the rule in April, when it takes effect; in turn, insurers haven't given distributors much to be excited about, according to Mr. Geising.

Distributors have also been tentative to sell VAs given uncertainties associated with the regulation.

“It's dragged sales down for the entire year. In talking to our members, there are still a lot of unknown questions distributors are working out,” Mr. Geising said.

The DOL placed variable annuities under the compliance regime of the best-interest contract exemption, or BICE, which allows for commission sales of the products but exposes firms to greater litigation risk.

Interestingly, indexed annuity sales don't seem to be experiencing the same sort of weakening, even though they're exposed to the same BICE compliance.

That's perhaps due to a lesser awareness and preparation for the rule among independent insurance agents when compared with broker-dealers, because many didn't expect indexed annuities would ultimately fall under the enhanced compliance regime of BICE, Mr. Geising said.

Independent agents are the primary distribution channel for indexed annuities, representing 58% of sales in the second quarter this year, according to Wink Inc., a tracker of the annuity products. By comparison, IBDs represented 16% of the total.

Limra previously forecast a big drop in indexed annuity sales next year, of 30%, as the rule takes effect.

Some believe independent agents will adopt a fire-sale mentality for indexed annuities ahead of the rule's implementation date, because they'll be more difficult to sell come April.

“You have agents selling like they have fourth- and fifth-stage cancer,” according to Stan Haithcock, an insurance agent and critic of the annuity industry. “They're going 100 miles per hour right now.”

Mr. Geising said sales have remained flat this year among independent agents compared to last year, and he hasn't seen such a fire sale play out in the data.

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