Despite the doom and gloom portrayed by the many reports of falling annuity sales numbers, according to a recent InsuranceNewsNet article, analysts are saying that the long-term prognosis for annuity products is actually very strong. The article compares the transfer of money from variable to fixed annuities (and back again) to the fluctuations seen when power passes between political parties. While some numbers look bad now, they are often misleading in the big picture.
“People keep saying there’s a big downturn, a big downturn, a big downturn, but I don’t see it,” said Jeremy Alexander, president of Beacon Research, an annuity data provider. “I think it’s a strong market.”
Alexander further explained that the tax-deferred nature of annuities makes them “sticky,” similarly to money staying within the family. “It’s not as if banking products are stealing annuities’ thunder.” And although we’ve seen the lowest first-half sales numbers in 16 years, he isn’t bothered, noting that fixed and variable sales combined have been able to continue at the $200 billion to $250 billion range year after year.
“In the long term, it will not really matter, but it does cause turbulence in how some folks respond,” said Tamiko Toland, a product research manager for Cannex, an annuity pricing information exchange.
There’s no denying that Americans are living longer and many are looking to secure guaranteed income in retirement to make up for disappearance of traditional pensions. Coupled with underfunded retirement accounts and an overall uneasiness of the survival of Social Security, it’s easy to understand why many are optimistic about the future of the annuity industry.
In the current market, fixed annuities are top dog, especially over their variable annuity counterparts. Last year, fixed annuities outsold VAs ($117 billion to $104 billion) for the first time in a long while, representing a record year for fixed annuities, according to LIMRA Secure Retirement Institute. The trend looks to be continuing according to first-half year numbers. But although the long-term stability of the annuity market looks favorable, short-term volatility is apparent, and it comes at no surprise with new fiduciary regulations, rising interest rates, investment restrictions in variable annuity space and a general “managing down” by insurers on their variable annuity portfolios.
“We’ve had a lot of volatility around expectations (from) DOL. When you look at the movement and take a step back, that’s what it is,” Toland stated.
And it’s the fixed indexed products that seem to be taking the brunt of that volatility. While indexed annuities finished with a record $61 billion in sales last year (a 12% increase from the year before), these products saw a first-quarter sales drop of 13%. However, the second quarter yielded stronger numbers, signaling they may be “down but not out.”
In the second half of this year, the variable annuity market, led by hybrid or buffered VA sales, actually soared 36% to $1.8 billion. But the overall variable annuity market decreased by 8% when compared with last year.
Last fall, the annuity industry braced itself for the implementation of the fiduciary rule, under what they assumed to be a Hillary Clinton White House, pushing for further regulation in the financial services sector. We all know how that played out, and now we’re faced with the fact that major parts of the fiduciary rule aren’t expected to be put into effect until July 1, 2019. As the original article puts it, it’s “no wonder the annuity market is suffering from a severe case of whiplash.”
Written by Rachel Summit