IBDs, wirehouses drive second-largest sales quarter for fixed indexed annuities

IBDs, wirehouses drive second-largest sales quarter for fixed indexed annuities
Variable annuities may have won the day in quarterly sales, but broker-dealers are stepping up their distribution of fixed indexed products, which hedge against rising interest rates.
SEP 14, 2015
The wirehouse and independent-broker-dealer channels propelled fixed indexed annuities to their second-best quarter of all time, with the insurance products notching $12.6 billion in total sales through June, according to figures published yesterday by the Insured Retirement Institute. The sales represent an 8.3% increase on the first quarter's $11.6 billion in sales, and are second only to the $12.9 billion mark set in the second quarter of 2014, according to IRI data, which was compiled by Beacon Research and Morningstar Inc. “The biggest reason [for the growth] is the broker-dealers are getting into the space,” said Jack Marrion, chief executive at Advantage Compendium, a research and consulting firm specializing in annuities. Several years ago, fixed indexed annuities were available primarily through insurance agents, but independent and regional broker-dealers and wirehouses have begun distributing them with more regularity, said Frank O'Connor, IRI's vice president of research and outreach. A recent IRI survey shows that fixed indexed annuities made up 10% of B-Ds' total annuity business in 2014, and half expect that percentage to increase going forward. The agent channel is “saturated,” meaning most insurance agents that want to sell fixed indexed annuities are already doing so, and most growth in that channel is organic at this point, Mr. Marrion said. There's more growth potential in the IBD channel, he added. All distribution channels saw growth in sales of fixed indexed annuity products for the quarter, but IBDs led the charge with a 38% uptick, followed by wirehouses with 30% sales growth, according to IRI figures. Agents weren't far behind, with 29% growth. “The overall atmosphere is one of growth of the product,” Mr. O'Connor said. Fixed indexed annuities offer investors a guaranteed minimum rate of return and are pegged to a specific index, typically the S&P 500. The value of an investor's contract increases along with any growth in the market index, but up to a particular maximum rate of return set by the insurer. A pending interest rate rise is driving use of fixed indexed annuities over fixed-income investments, Mr. O'Connor said. Because the annuity contracts have a guaranteed rate of return, interest rate movements don't directly affect the value of the investment as they would in bonds, for example, he explained. The guaranteed return and opportunity to partake in stock market gains grabbed the attention of wirehouses a few years ago. Allianz Life led the pack in terms of fixed indexed annuity sales in the second quarter, bringing in $2.13 billion. It was followed by American Equity Investment Life Holding Co., Great American Insurance Group, American General and Athene Annuity & Life Assurance Co., with sales of $1.78 billion, $795 million, $712 million and $673 million, respectively, according to Beacon Research. Variable annuities had significantly more sales on the quarter than fixed indexed products, at $35.6 billion, an 11.7% jump from the first quarter and flat year-over-year. Larry Rybka, president and CEO of ValMark Securities, a broker-dealer, said that he still finds variable annuities to be a more attractive option for consumers. ValMark sells variable products at a 15:1 ratio to fixed indexed annuities, he said. Variable products don't cap returns like fixed indexed annuities do, so investors can participate in the entire market upside and receive dividends, unlike their fixed indexed counterparts. They do this while still locking in investors' principal protection, Mr. Rybka said. Variable products also provide policyholders with a wider range of instruments in which to invest, he added. Ben Norquist, president and CEO at Convergent Retirement Plan Solutions, said that from an accumulation standpoint, variable annuities do provide more upside potential. Advisers trying to create an income stream for clients may wish to consider fixed indexed products in the fixed-income portion of a portfolio, though, because unlike variable products they offer a guaranteed minimum rate of return even if the market dips, Mr. Norquist said. Variable contracts lock in principal, but don't have a guaranteed return. Anecdotally, Mr. Norquist added that he hears the living benefit riders are “richer” in fixed indexed products than in variable ones.

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