Buffer annuities push variable annuity sales to three-year high in Q3

Buffer annuity sales are expected to increase more than 50% in 2019 as a result of low interest rates and new product features

Nov 19, 2019 @ 1:27 pm

By Greg Iacurci

Variable annuity sales hit a three-year high in the third quarter, a notable turnaround from their slump in recent years that largely reflects the growing sales of buffer annuities.

Buffer annuities, a subset of variable annuities, are also known as structured, variable-indexed and registered index-linked annuities. If indexed annuities are for conservative investors and variable annuities for more aggressive ones, buffer annuities fall somewhere in the middle.

Insurers sold $4.8 billion worth of buffer annuities in the third quarter, up 17% from the second quarter and 62% from the third quarter of 2018, according to the Limra Secure Retirement Institute.

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Limra estimates annual sales of buffer annuities will total between $17 billion and $17.5 billion in 2019, which would be an increase of more than 50% from the level in 2018. Sales in 2018 were already up 22% from 2017.

Lower interest rates and uptake of new product features drove higher buffer-annuity sales in the third quarter, said Todd Giesing, director of annuity research at Limra.

Rates on 10-year Treasury bonds have dipped 100 basis points since the beginning of year, to 1.68% on Sept. 30 from 2.66% on Jan. 2. Insurers have reduced payouts on indexed and fixed-rate annuities as a result of the lower-interest-rate environment, which makes buffer annuities more attractive to consumers looking for higher yields, Mr. Giesing said.

And buffer annuities, which primarilyhave been structured as asset-accumulation products since their debut in 2010, have started becoming more income-focused. Insurers began debuting buffer annuities last year with riders that offered guaranteed living benefits, a feature providing consumers with a guaranteed income stream in retirement. Sales with that feature increased $500 million from the second to the third quarter.

These guarantee features make the products more complex, however, Mr. Giesing said. Regulators had already expressed some skepticism about financial advisers' ability to understand the products.

"I spent some time with my team trying to see how this thing works. It's very complicated," Donald Lopezi, senior vice president and regional director of the western region for the Financial Industry Regulatory Authority Inc., said at an industry conference in 2017.

"We have some individuals who really understand VAs and they were struggling with this," Mr. Lopezi said. "You have to wonder, does the firm understand it? Does the rep?"

Independent broker-dealers are driving much of the buffer-annuity growth. Their third-quarter sales were up $1.3 billion, or 87%, from the same period last year.

Total variable annuity sales in the third quarter would have decreased 2% year-over-year without the sales of buffer annuities; instead, VA sales were up 6%, to $26.5 billion, their highest quarterly total in three years.

VA sales had declined for six consecutive years through 2017; they were up just 2% year-over-year in 2018. Insurers changed the products to better control their risk in the wake of the 2008 financial crisis, but made them less attractive to consumers as a result.

The Labor Department's fiduciary rule, issued in 2016, made it more difficult for advisers to sell VAs (and other high-commission products) and diverted some of the industry's attention away from sales and marketing efforts. An appeals court struck down the Obama-era regulation in 2018.

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