Indexed annuities likely to rebound after dip in sales last year

An increase in market volatility, higher interest rates and dissipating anxiety around the Labor Department's fiduciary rule are improving the product outlook

Apr 25, 2018 @ 5:01 pm

By Greg Iacurci

Sales of indexed annuities look like they are going to bounce back this year after dipping in 2017, a first for the product line in almost a decade.

Broker-dealers and market observers indicate that a combination of trends — namely, an increase in market volatility, higher interest rates and dissipating anxiety around the Labor Department's fiduciary rule — are improving the product outlook.

"I'm definitely hearing from [distributor] groups that their sales are up," said Sheryl Moore, president and CEO of Moore Market Intelligence, a consulting firm.

Raymond James & Associates, for example, saw its indexed-annuity sales swell 50% year-over-year, to $321 million, in the first quarter of 2018.

While that percentage may appear elevated, since the comparison is against the relatively low sales volume in the first quarter of 2017, it was "by far a record quarter," said Scott Stolz, senior vice president of Private Client Group investment products and wealth solutions.

Raymond James' sales in March also broke a monthly record, beating the firm's previous high set in April 2016 by about 20%.

"I wouldn't expect we'll continue to really see much growth in each successive quarter, but I would expect our quarterly result for the first quarter to become the norm for the foreseeable future," Mr. Stolz said. "It wouldn't surprise me if each quarter gets a little bit better."

Indexed annuity sales at broker-dealer Wunderlich Securities Inc. were up 21% year-over-year in the first quarter, said Bob McCommon, senior vice president and director of special products.

"I think the [sales] outlook is as good as ever," Mr. McCommon said.

Prior to last year, indexed-annuity sales had grown in consecutive years beginning in 2007. Annual sales last year were down more than 5% from 2016, at $57.6 billion, according to Limra.

Part of the Department of Labor fiduciary rule, which raises investment-advice standards in retirement accounts, came into effect in June 2017. The rule upped the sales standard for indexed and other annuities in accounts like IRAs, creating challenges and uncertainties from a sales and compliance perspective.

Now, the DOL rule is "in the rearview mirror," as firms have become accustomed to the rule and their new internal practices, Ms. Moore said.

"The DOL was really negative," she said. "It was a major disruptor to business."

A recent court ruling against the fiduciary rule by the 5th Circuit Court of Appeals, which vacated the regulation, could spell the end of the rule, though its fate is still uncertain. The Trump administration is currently reviewing the rule, the remainder of which is scheduled to go into effect in 2019, and speculation is the rule could be watered down.

Heightened market volatility since the beginning of the year has also helped indexed annuities, observers said.

Last year's steadily increasing market, which experienced relatively little volatility, led some advisers to "become less concerned with trying to find conservative investment options," Mr. Stolz said.

Indexed-annuity returns are generally less affected by the ups and downs of the market than variable annuities. While indexed-annuity performance is tied to market performance, contracts can't credit less than 0% over a specified contract time period, whereas variable annuities can.

And, insurers are generally able to offer more attractive product features — such as a higher maximum return — when interest rates are high. Interest rates are currently at their highest level since 2008, and the Federal Reserve has indicated it may hike rates at least three times this year.

Further, variable annuities sold with income riders — which offer consumers certain guaranteed income benefits — have also begun looking less attractive due to risk-management mechanisms, such as volatility controls and more conservative investment choices.

"People have been disappointed to angry over performance," Mr. McCommon said, adding that dissatisfaction with VAs generally leads indexed annuities to look more attractive.

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