Buffer annuities grow in popularity

Buffer annuities, also known as structured or variable-indexed annuities, are starting to gain traction.

These products, a cross between indexed and variable annuities, have seen sales surge, as several other annuities have seen sales retreat. The Insured Retirement Institute, in its state of the industry report published in December, went so far as to say buffer annuities are “beginning to flourish.”

Take Brighthouse Financial Inc., which houses MetLife’s former retail annuity business. The company sold $2.5 billion of its Shield annuities last year, up 50% from 2016, according to company earnings results announced Monday.

Those figures are in line with the broader industry. LIMRA, an insurance industry group, estimates buffer-annuity sales exceeded $9 billion last year, up roughly $2 billion — or 25% — from 2016, and $7 billion — or 350% — from 2014.

“It’s been a big ramp-up over the past few years,” said Todd Giesing, director of annuity research at the LIMRA Secure Retirement Institute.

Economic factors, such as low interest rates and the perception of a peak in the equity market, as well as broader product availability are among the primary drivers of the upswing, Mr. Giesing said.

Buffer annuities are similar to indexed annuities in that they insulate investors in the event of market loss and offer a degree of upside potential, often limited via a cap in the interest rate. However, investors in buffer annuities share some of the market loss with an insurer, in exchange for higher caps.

“We’ve had a bull market for about nine years now, and clients are trying to lock in some of their gains and hedge some downside risk,” said Jessica Rorar, an investments planner at ValMark Financial Group.

Further, low interest rates have depressed payouts from fixed annuities, and investors have sought out products offering greater return, Mr. Giesing said.

Buffer annuities, classified as a type of variable annuity, are accumulation-focused (not income-focused) products meant mostly for conservative to moderately aggressive investors, Ms. Rorar said.

The term buffer annuity is a bit of a misnomer, she said, because some products have a “floor” rather than a “buffer” to hedge downside risk.

Let’s say a product has a 10% buffer and the market falls 25% over the annuity’s term. Investors would lose 15% from their account in this scenario, because the insurer eats the first 10% of loss. Investors in a product with a 10% “floor” would lose 10% in this scenario, because the floor serves a cap to the downside.

Buffer annuities are relatively new. AXA Equitable Life Insurance Co. was first to market, in 2010, and there are only three other insurers that followed suit in the intervening years: Brighthouse, Allianz Life Insurance Co. of North America and CUNA Mutual.

But more carriers are coming into the space, which will further add to the rise in sales. Voya Financial is getting back into the market after a hiatus, Great-West Financial is launching a product this month and Lincoln Financial will do so later this year, Ms. Rorar said.

Buffer annuities have helped lessen the sting of a years-long slide in overall variable annuity sales. While buffer annuities made up only 2% of retail variable annuity sales in 2014, LIMRA estimates they made up more than 10% of sales last year.