Fixed annuities are on a tear

Fixed annuities have been on a tear this year, with sales seeing double-digit growth across several product categories amid rising interest rates and easing regulatory pressure.

Overall sales of individual fixed annuities were $33.7 billion in the second quarter of 2018, the third-highest quarterly total of all time, according to the Limra Secure Retirement Institute. The insurance group is forecasting that total annual sales will hit record levels by year-end.

“The only other time they were higher was right in the peak of the financial crisis as we saw a flight to safety and people getting out of equity-based products and looking for principal protection,” Todd Giesing, Limra’s director of annuity research, said of quarterly sales.

Fixed-rate deferred and indexed annuities, a subset of fixed products, have been the primary drivers of growth. Fixed-rate sales were up 23% year-on-year in Q2, to $11.4 billion. Meanwhile, the $17.6 billion in indexed annuity sales was the highest-ever quarterly total for the product line; sales were up 17% year-on-year.

Fixed-rate products offer a specified crediting rate to consumers over a given period, such as three or five years. Indexed products are linked to the stock market, offering maximum and minimum returns over a given period. Rising interest rates have made both products more attractive to financial advisers and consumers, since insurers are able to offer higher payouts.

The Federal Reserve had lowered interest rates to near zero roughly a decade ago as it tried to prop up the economy in the midst of the financial crisis. But rates are now rising; the Fed increased its benchmark interest rate in June, the seventh time it had done so in three years. Fed officials have signaled the likelihood of two more rate hikes this year, which would bring the range to 2.25%-2.5% by year-end.

At the close of 2015, right around the time the Fed began its shift from rock-bottom rates, fixed-rate deferred annuities were paying an average of 2.82%; today, their average rate is up to 3.08%, according to Wink Inc., which tracks annuity data. The average point-to-point cap on indexed annuities has also increased, to 5.37% from 3.81%, over the same period, according to Wink.

The current market for fixed annuities, Mr. Giesing said, represents a shift for the industry — it’s not a flight to safety, since the current bull market in stocks is nearly a decade old, but rather a response to these improving rates.

If there’s a downturn in equity markets next year, as Limra’s economic model predicts, it’d be the “perfect storm” underpinning more growth in fixed products, he said.

Limra is predicting annual sales of fixed-rate products will increase 15-20%year-on-year in 2018, and as much as 25% in 2019.

Indexed products have also been propped up by the Department of Labor fiduciary rule’s being taken off the books earlier this year. The rule, which upped investment-advice standards in retirement accounts, would have made it more difficult to sell these products.

“Now that that burden or concern is gone, we’re back to business as usual for the indexed annuity space,” Mr. Giesing said.