Indexed annuity sales projected to grow nearly 40% by 2023

Continued market volatility and rising interest rates will push fixed annuities to new highs, Limra estimates

Apr 5, 2019 @ 2:01 pm

By Greg Iacurci

Indexed annuities, fresh off a record sales year, are poised for substantial growth over the next four years, according to projections from Limra, an insurance industry group that expects the stock market to remain volatile and interest rates to continue their steady ascent.

Limra projects that sales of indexed annuities — a type of fixed annuity — will rise to $96 billion by the end of 2023. That's $26.4 billion more than last year's total — a 38% increase.

Meanwhile, the group expects fixed-rate deferred annuity sales to swell by as much as 40% over the same time period to $62 billion, up from $44.2 billion last year.

Stock market gyrations toward the end of 2018 helped overall fixed annuity sales smash their previous record, as investors sought more conservative places to park their money. Interest rates are also on the rise, recovering from a decade of rock-bottom rates instituted around the time of the financial crisis, which helps investors get higher payouts on fixed annuities.

Todd Giesing, director of annuity research at the Limra Secure Retirement Institute, anticipates these trends will remain in place over the next few years, which he calls the "perfect recipe" for fixed-annuity growth.

"I think cash [and] fixed annuities will become an actual asset class again, where the last decade or so in this low-interest rate environment, it wasn't something anyone would even consider," said Jason Kolinsky, partner at Kolinsky Wealth Management.

The S&P 500 index ended 2018 down 6.2%, its first annual decline since the financial crisis. In the fourth quarter alone, the index lost nearly 14% of its value.

Variable annuity sales are expected to grow up to 10% through 2023 — to $110 billion from $100.1 billion last year — but that growth will be hampered by a volatile stock market, Mr. Giesing said.

While the market is up more than 14% since the beginning of the year, investors and advisers are likely fleeing to more conservative types of annuities, said Mr. Kolinsky, for a level of asset protection out of "fear of the market tanking again."

"January is perhaps one of the stronger Januarys we had by January standards for a while," Ron Grensteiner, president of American Equity Investment Life Holding Co., the sixth-largest indexed-annuity seller in 2018, said on a recent earnings call. "And I think volatility in the marketplace is certainly playing a factor in that."

Interest rates also increased throughout most of 2018, with the benchmark 10-year Treasury rate going from roughly 2.5% at the beginning of 2018 to a high of more than 3.2% in early November.

However, it has since fallen back to around 2.5%. The Federal Reserve, which raised its target interest rate four times in 2018, has indicated a much slower approach in the near term — potentially even a rate cut — given economic indicators.

Mr. Kolinsky believes interest rates will continue to rise but said lofty annuity projections would likely fall short of reality if that doesn't come to pass.

Tamiko Toland, head of annuity research at CANNEX Financial Exchanges, said the Department of Labor's fiduciary rule being struck down in court has been especially helpful in providing a better sales environment for indexed annuities.

The rule, which raised investment-advice standards in retirement accounts, would have made it more challenging for brokers and insurance agents to sell indexed annuity and other financial products.

"It was a real regulatory gauntlet that was put on indexed annuities," she said.

The rule was taken off the books last year following a ruling against it in the 5th Circuit Court of Appeals.

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