Fixed indexed annuities notch record sales quarter

Investors continue to migrate to fixed indexed annuities and shy away more from variable annuities amid low interest rates and market volatility

Dec 15, 2015 @ 11:13 am

By Greg Iacurci

Fixed indexed annuities posted their highest quarterly sales on record in the third quarter, building on a recent surge in popularity for the annuity products that's largely due to market volatility and persistently low interest rates.

Fixed indexed annuities posted $14.4 billion in sales last quarter, beating by $1.5 billion their previous record of $12.9 billion, set in second-quarter 2014, according to figures published today by the Insured Retirement Institute, an industry group.

This year's third quarter sales mark a 14.3% increase on the second quarter's $12.6 billion, and 23.1% growth on last year's third quarter sales of $11.7 billion, according to IRI data, which was compiled by Beacon Research and Morningstar Inc. Strong fixed indexed annuity growth pushed overall fixed annuity sales, at $26.5 billion, to their best quarter in more than six years.

The current low-interest-rate environment has made fixed indexed products particularly attractive relative to other fixed income investments.

Fixed indexed annuities are yielding higher returns than certificates of deposit, and deliver equivalent yield to bonds without exposure to interest-rate risk, according to Jack Marrion, chief executive at Advantage Compendium, a research and consulting firm specializing in annuities.

Bond prices tend to move opposite interest rates, which makes bonds look less attractive as the market expects the Federal Reserve to raise interest rates as soon as Wednesday.

Market volatility last quarter also drove investors to seek the protection offered by fixed indexed annuities over the higher growth potential in variable annuities, according to IRI.

Fixed indexed annuities are tied to a specific index, the S&P 500 being the most popular. They offer principal protection to investors and the possibility to participate in gains if the market performs well, although the upside is typically capped or limited by certain crediting mechanisms.

“The protection of principal in the indexed annuity is absolute,” Mr. Marrion said. “You will not lose principal and credited interest if the market goes down.”

Product design on fixed indexed annuities has also evolved for the better over the past several years. That's put them more in line with variable annuities from a competitive standpoint, and has led distribution channels that have historically stuck to variable annuities to eye fixed indexed annuities more favorably.

“It's only relatively recently they've started being made available through wirehouses, independent broker-dealers, regional firms, so that's expanding the availability of the product and creating new markets,” according to Frank O'Connor, IRI's vice president of research.

Variable annuity sales continued on their downward sales trajectory in the third quarter, notching a total $32 billion. That's a dip of just over 10% from last quarter's $35.6 billion, and a 9% dip from third-quarter 2014.

Investment-only variable annuities are a bright spot in the VA market, enjoying strong sales as overall VA sales have weakened.

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