Annuity FYI Blog

Insurance companies and financial advisors are pleased that the Government Accountability Office is recommending immediate annuities to middle income families, but they don’t think that a huge sales boom is going to happen overnight.  According to Darla Mercado’s Investment News article, “Financial advisers, insurers hail GAO plug for immediate annuities,” the GAO is admitting that Social Security is flawed and retirees need to have added income to finance their retirement.  Despite the fact that immediate annuity rates are still not at an ideal level because of the financial markets, immediate annuities are still selling well and helping millions finance their retirement.  Sales of $7.6 billion in 2010 were just slightly above the sales of $7.5 billion in 2009.  A steady increase is likely to continue, especially after the GAO support.

LIMRA International expects immediate annuity sales to be around $13 billion within five years.  A big part of the increase can be attributed to immediate annuities being marketed through more distribution channels, including banks, wirehouses, and more broker-dealers.  The GAO support could help raise awareness of immediate annuities and increase sales as well.  One advisor points out that it is more important for investors to protect their money than it is to grow it, even though both are very important.  Along with recommending single premium immediate annuities to clients, he is also a fan of a deferred fixed annuity with inflation adjustment.  The government is also working with retirement plan sponsors on getting annuities included in more plans as a payout option and putting annuity payout information on plan statements.

According to a recent survey, investors are quite uncertain with the retirement issues surrounding them and could use more help from advisors.  Danielle Andrus of Advisor One says that many people are not happy with the support offered from their employer’s retirement plan in her article “Unsatisfied and Uncertain–Investors Need Advisors’ Help: Retirement Report Roundup.”  Cogent Research’s study of investors found that more than half were unhappy with their current situation and need advisors’ help transferring 401k annuities and other retirement savings plans.  Those who are happy with their current employer plans are three times more likely to roll their money over with the same company holding their 401k or 403b plans.  Investors were most satisfied with Fidelity, Wells Fargo, Vanguard, Merrill Lynch, and Charles Schwab.

LIMRA research has found that half of pre-retirees have not even considered the possibility of outliving their income.  Fewer than one third of those set to retire in the next three years actually have a written retirement plan in place.  Advisors will be able to help pre-retirees and retirees make decisions to carry their savings throughout their lifetime.  Annuities with guaranteed living benefits have been increasing steadily and were up 8% in 2010.  With $81 billion in sales of annuities with guaranteed living benefits in 2010, the total assets of variable annuities carrying that rider went to $521 billion during the fourth quarter of last year.  New annuities with these riders were introduced in 2010 by Hartford, Principle, and Protective.  Our experts can help you with 401k annuities and guaranteed living benefit riders that will make your money last over your lifetime.

Independent broker dealers are selling a greater percentage of the total annuities market than they did in the past, according to Linda Koco of Insurance News Net.  In the article “Independent B/Ds Gain Annuity Market Share,” it says that their individual market share has been increasing since the study was started in 2006.  IBD’s were the top distributor of variable annuities in 2010, capturing 30% of the market share compared to their 26% in 2006.  With 24% of the market share for variable annuities in 2010, career agents were the second place seller.  This was a slight increase from their 23% market share in 2006.

Although IBD’s hold a relatively small portion of the fixed annuities market, their portion has increased from 4% in 2006 to 6% of the market share.  Their fixed equity indexed annuities portion is also very small, but increased from 1% in 2006 to 2% in 2010.  The bank channel is the top competition for IBD’s in the fixed annuities market, but their share is down to 40%, from a high of 48% in 2008.  Independent agents have a strong hold on the fixed equity indexed annuities market with an 85% market share.  While that is down from their 89% market share in 2006, the IBD’s portion is miniscule in comparison.

Some of the channels lost some of their market share during the study, in addition to the independent agents decline in the fixed equity indexed annuities market.  The bank channel lost the most market share in the variable annuities market, but it isn’t that important overall since their share of that market is fairly low.  Independent agents lost the most in the fixed annuities market, but this is not a surprise since 5 year fixed annuity rates were relatively low over the period studied.  Overall, IBD’s have been squeezing into the annuities market in any way that they can over the past 5 years or so.  LIMRA found that there were approximately 75,000 IBD’s in 2009 selling annuities and making their mark in the industry.

As sales of variable annuities increase, many advisors are concerned that companies will not be able to hedge the products.  According to “Surge in VA sales leads to capacity questions” by Darla Mercado of Investment News, advisors worry that companies won’t be able to keep up with the sales increase and are looking deeper into the variable annuities they sell.  LIMRA says that $140.5 billion of variable annuities were sold last year, an increase of 10% from the year before.  Companies are trying to balance offering transparency to their advisors so that they can see how the risk is managed without divulging too much of their strategy.  It can be tough to find out exactly what insurers are doing to manage their risk, but companies like Prudential and MetLife are working with advisors and wholesalers to satisfy the issue of transparency in their variable annuities.

The president of Silverman Financial, Inc. actually flew to Prudential to uncover some answers for himself.  After taking the contracts apart to study them and putting everything back together, he determined that the company had nothing to hide from advisors.  Insurance companies do provide literature to advisors communicating their risk strategy; it’s just that some do it better than others.  For those looking to compare equity linked CDs, annuities and other investments and see how companies manage the risk associated with them, you usually just have to ask for the information.

MetLife started an open communication with advisors during the financial crisis, and although they stopped quarterly conference calls, they still offer information on their hedging and revenue sources through literature.  Jackson National offers advisors a question and answer paper that deals with hedging, interest rate swaps, and more.  Prudential not only offers continuing education on hedging, but they publish a white paper dealing with many different aspects of annuities.  Some companies offer up more information than others, but since the previous three companies account for 40% of the sales of variable annuities, you can see that it is possible to get information to advisors who then pass it on to clients.  It is still important that insurance companies sell more than just variable annuities because you never want to put all of your eggs in one basket.

Sales of immediate annuities and fixed indexed annuities increased in 2010, according to National Underwriter’s Allison Bell.  The article “Annuity Data: Fixed Annuities; Variable Annuity Guaranteed Living Benefits” summarizes the information collected by Beacon Research Publications Inc.  Fixed annuity sales decreased 31% from 2009 to 2010, but were still $72 billion.  It doesn’t necessarily mean that people are buying fewer annuities though.

Many investors decided to purchase fixed indexed annuities or variable annuities instead of fixed annuities because of low annuity rates.  Indexed annuity sales were up 6% in 2010, for a total of $31 billion.  Investors like the lower risk indexed annuity because they get some guarantees along with exposure to the market at little to no risk.  There were $8 billion of income annuities sold in 2010, a 2% increase from 2009.

LIMRA conducted a survey in the insurance industry and found out that investors purchasing variable annuities are more likely than ever to add guaranteed living benefit riders to their annuities.  In the fourth quarter of 2010, 87% of investors added a GLB to their variable annuities.  This was an increase from 2009 when 84% of investors added the riders.  Total variable annuity assets that include GLBs went up to $521 billion in the fourth quarter of 2010, nearly doubling the total from just two years prior.