Annuity sales rise in Q1 thanks to just two product types

Annuity sales picked up by 9% during the first quarter, led by heightened demand for fixed-rate deferred and registered index-linked annuities, recent industry data show.

Although sales figures were down considerably for most product categories compared with the first quarter of 2020, fixed-rate deferred annuities and registered index-linked annuities, or RILAs, saw purchases rise by 46% and 89%, respectively, according to a recent report from Limra’s Secure Retirement Institute.

That continues a trend seen across the annuities business in 2020, when demand for those two product types increased amid low interest rates, market volatility and the pandemic environment.

“Simply put, the current economic environment favors RILAs,” Todd Giesing, assistant vice president of annuity research at the Secure Retirement Institute, said in an announcement. “RILAs offer better pricing than indexed annuities to investors looking to mitigate downside risk and enjoy potential investment growth as the bull market continues.”

Sales of RILAs totaled $9.2 billion during the first quarter, representing about a third of all variable annuity sales, Limra’s data show. By comparison, RILAs had $4.9 billion in sales in the first quarter of 2020, accounting for less than a fifth of total VA business. RILAs are projected to see sales increase by up to 50% this year, according to the Secure Retirement Institute.

Overall VA sales were up 15% quarter over quarter, but traditional VAs, or those that are not RILAs, dragged that figure down. Sales of traditional VAs totaled $20.7 billion, down 2% from $21.1 billion during the first quarter of 2020, according to Limra.

Ordinarily, insurers might have expected to see a boom in indexed annuity sales over the past year — but the options pricing for the derivatives used to back those products increased substantially, meaning that insurers couldn't afford to sell products with attractive rates, said Sheryl Moore, CEO of Wink Inc. and Moore Market Intelligence.

“The rates on indexed annuities are not nearly as competitive as they have been in the past,” Moore said.

Further, the recent stock market performance favors variable annuities, she noted. But with interest rates low, insurers haven’t offered the high living and death benefits they did years ago — and some major companies have been getting out of the business of selling VAs with guarantees altogether.

“[Having] high guarantees generally means you [as an insurer] are not going to be able to earn as much,” Moore said. “Insurance companies are looking for an annuity story where they can focus on accumulation, because they don’t want to tell an income story — because the guarantee costs so much right now.”

RILAs, also known as structured annuities, have limits on growth and losses, making them a potential fit for people who need upside but are leery of the market. Sales of those products have seen double-digit increases for several years, and they could surpass indexed annuity sales by 2023, Moore said.

“Most insurance companies that have either an indexed annuity or VA are actively doing development on structured annuities right now,” she said. The product type is still immature compared with others, and “there’s a lot of opportunity for innovation and new ideas.”

However, as insurers dangle new products with attractive features, Moore said she advises buyers to beware, as features such as interest calculation methods might differ, and a growth rate capped at 6% might not necessarily be better than one capped at 3.5%, for example.

“It’s really about optics, not really about additional value,” she said.

The other product that saw considerable sales growth during the first quarter — fixed-rate deferred annuities — could see sales dip slightly this year, although sales will likely rebound in 2022, according to the Secure Retirement Institute. During the first quarter, the products raked in $14.3 billion, up 46% from the $9.8 billion they took in during the first quarter of 2020, the Limra data show.

“Consumers, still reeling from the economic fallout from the pandemic, are seeking principal protection, and crediting rates for fixed-rate deferred products remained steady and well above any other short-term investment vehicle, like CDs,” Giesing said in the announcement.

Total fixed annuity sales were up 4% for the quarter, but only fixed deferred products saw higher figures. Fixed indexed annuity sales were down by 15%, as those of deferred income annuities (13%), fixed immediate (26%) and structured settlements (20%), according to the Secure Retirement Institute.