Sales of variable annuities plunged to their lowest level in 15 years last quarter as the Labor Department's fiduciary rule loomed large and market volatility scared consumers away from equity-based products.
Variable annuity sales were $26.6 billion in the first quarter, a drop of 18% compared with the same quarter in 2015 and the lowest quarterly sales total since 2001, according to the LIMRA Secure Retirement Institute's first-quarter U.S. Retail Annuity Sales Survey. Nineteen of the top 20 variable-annuity product manufacturers reported decreases. AXA Equitable Life Insurance Co. was the one carrier that saw an increase in VA sales on the quarter.
Further, the market share of variable annuities compared to overall annuity sales dropped to its lowest level in more than 20 years. VA market share was 45% for the quarter, compared to 60% a year ago. The last time VA market share was 45% or lower was in 1995, according to LIMRA.
Lackluster quarterly sales are in line with a multiyear trend that's been playing out with variable annuities, with 2015 seeing the fourth consecutive year of sales declines.
Volatility in equity markets early in the year, following a dip in the market toward the end of 2015, was one of the primary factors in the variable annuity sales slump, said to Todd Giesing, assistant research director at the LIMRA Secure Retirement Institute.
“You saw consumers kind of shy away from products that were equity-based for the quarter,” Mr. Giesing said.
The S&P 500 dropped around 5% in January, following a 1.75% dip in December.
Fixed annuities seem to have benefited from consumers' flight to more conservative products — all types of fixed annuities experienced double-digit growth during the quarter, contributing to a 48% year-on-year spike in growth, to $32.3 billion, for all fixed annuities compared to the same period last year.
The Department of Labor's fiduciary rule, issued in its final form in early April, also played a part in variable annuities' falloff for the quarter, Mr. Giesing said.
Although the rule, which raises investment advice standards for retirement accounts, was only in its proposal stage at the end of the first quarter, advisers were likely “waiting on the sidelines” to see how the final rule would treat variable annuities, Mr. Giesing added.
The rule places variable annuity products under the best interest contract exemption portion of the fiduciary rule, which exposes advisers and their firms to more compliance and litigation risk. Many believe the associated risk will push variable annuity sales even lower.
Indeed, LIMRA forecasts a 15% to 20% drop in sales for 2016 overall when compared to the $133 billion in sales for 2015. It forecasts another 25% to 30% drop in 2017, the year the fiduciary rule takes effect.
Many annuity carriers and advisers had more of a focus on fixed indexed annuities than variable annuities in the first quarter, another reason variable sales may have dipped, Mr. Giesing said. Fixed indexed annuities had a specific exemption (known as Prohibited Transaction Exemption 84-24) from the BICE in the DOL's proposed rule, leading some to consider these products as a sort of pivot product from variable annuities for those who wanted to avoid complying with the BICE.
Ultimately, fixed indexed annuities fell under the BICE in the final rule, receiving the same treatment as variable annuities. LIMRA is forecasting a dip in sales of more than 5% to 10% in 2017 as a result of this treatment, according to Mr. Giesing, which would end an eight-year run of positive growth.