Department of Labor's fiduciary rule blamed for insurers' massive hit on variable annuity sales

The regulation was the primary factor in the pullback, but other factors have contributed to the multiyear slide

Mar 28, 2017 @ 2:00 pm

By Greg Iacurci

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The variable annuity industry took a beating in 2016, with several of the top sellers inking losses upwards of 25% on the year and some exceeding 40%.

The Department of Labor's fiduciary rule, issued in its final form last spring, played a big role in the industry's bruising, observers said.

"I think what happened last year, with the significant drop, the DOL played a huge role in that," said Bernie Gacona, senior vice president and director of annuities at Wells Fargo Advisors.

But variable annuity sales have been declining for the past half-decade, and some believe the trend is symptomatic of other factors, too, such as poor product structure, the rise of indexed and hybrid indexed-variable annuities, and a strategic move among insurers to control their VA sales.

Transamerica Life Insurance Co., Lincoln Financial Group, MetLife Inc., American International Group, Pacific Life Insurance Co. and Jackson National Life Insurance Co. were among those experiencing the largest annual losses: -45%, -42%, -39%, -31%, -30% and -26%, respectively, according to figures from Limra, an insurance industry group.

Jackson National, the sales leader, saw a $6 billion decline, the largest loss in dollar terms.

Top variable annuity sellers, 2015-16
Source: Limra

The broader industry fared similarly – the roughly $105 billion in VA sales was its worst showing since 1998.

The DOL fiduciary rule "brought some tentativeness from advisers" in terms of using variable annuities with clients, said Todd Geising, assistant research director at the Limra Secure Retirement Institute.

"It's not a particular product or company's strategic decision moving the industry itself," he added. "It truly is the forces specifically with the DOL rule."

The regulation enhances the sales standard for retirement investment products, making it riskier for broker-dealers and their registered representatives to sell variable annuities, especially those sold on commission, in qualified accounts such as IRAs.

Some advisers backed off of sales until receiving more concrete information on their compensation for product sales, said Mr. Gacona of Wells Fargo. Some advisers were hesitant after hearing they may not receive trailing-commission dollars due to broker-dealers' potential compliance treatment of the rule, he added.

Variable annuity sales were down $11 billion last year among independent broker-dealers, the No. 1 distribution channel for VAs, according to Limra. They were down $6 billion among the wirehouse brokerages.

Variable vs indexed annuity sales, 2011-16
Source: Limra

Brian Kroll, head of Annuity Solutions for Lincoln Financial Group, acknowledged 2016 was a challenging year in the variable annuity industry due in part to "adjustments in the market." However, he said the firm expects demographic and other trends to contribute to long-term growth in the annuity market.

The DOL rule's implementation date is scheduled to kick in April 10, but the Trump administration is trying to delay that by at least 60 days. Observers believe the rule may ultimately be amended.

If the rule is delayed, Limra is forecasting VA sales to dip another 10-15% this year, Mr. Geising said. If it goes into effect on schedule, that estimate swells to 20-25%.

"As you know, industry sales fluctuate and our market share does as well," Transamerica spokeswoman Julie Quinlan said of the firm's sales decline.

The other insurers declined comment.


However, the DOL regulation doesn't provide the whole story.

Persistently low interest rates have led to relatively unattractive product pricing, said Tamiko Toland, a consultant and former retirement income analyst at Strategic Insight. Interest rates underpin features such as guaranteed withdrawal percentages, so lower rates have led insurers to dilute the "richness" of such benefits, making them less attractive to consumers, she said.

The Federal Reserve in March hiked interest rates for just the third time since the financial crisis, when rates were near zero.

Insurers have also diversified their focus toward other product lines such as indexed annuities and indexed-variable hybrid products, which are also known as buffer annuities or structured annuities.

Lincoln Financial, for example, has "pushed pretty hard on its indexed line," Ms. Toland said.

The firm's annual indexed annuity sales were up roughly 31%, to $1.7 billion, last year, according to Limra figures. AIG also saw a slight increase of 9%, to $3.6 billion.

Indexed sales had their best year on record in 2016, with the products taking in almost $61 billion. While hybrid products (which Limra factors into overall VA sales) only represent a small sliver of the VA market, industry sales doubled over 2015, said Mr. Geising of Limra.

MetLife, for example, saw a 45% year-on-year increase, to $457 million, in fourth-quarter sales of Shield Level Selector, one of its hybrid products, according to a recent company earnings call.

And AXA Equitable Life Insurance Co., another big player in the hybrid market, was a rare example of a company that saw an increase in its overall VA sales last year.

To a certain extent, some sales that may have otherwise gone to variable annuities went to one of these other product lines, Mr. Gacona said.


To him, the dynamic of growing sales among indexed and hybrid products and lagging VA sales indicates advisers and consumers take issue with certain VA product features, particularly their performance and expense.

For one, most insurance companies have placed restrictions on the types of funds consumers can use when buying a VA with an income guarantee, which some find frustrating because the result is diluted performance.

"I do truly believe it's a performance and expense issue with variable annuities," Mr. Gacona said. "How do you explain the continued growth of indexed variable annuities? They're still selling extremely well."

"You've had a run-up in the market and it didn't do anything for VA sales," he added, alluding to the current bull market, and how consumers would typically be drawn to VAs in a strong market.

Mr. Geising, though, believes some of the negative sales results are actually due to insurers making a conscious effort to restrict their product sales, especially those with guaranteed living benefits, in order to control the risk on their books. (Insurers need to ensure they'll be able to pay out such income guarantees.)

Of the $1.3 trillion in retail variable annuity assets, roughly two-thirds have a guaranteed living benefit attached, a proportion that's increased steadily over the years, Mr. Geising said.


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