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VA Sales Are Falling and Likely to Keep Falling

The VA market is eventually expected to stabilize. In the interim, there is no good reason not to buy VAs if you have a long-term horizon, annuity experts say, because they are the only annuity fully invested in the stock market and so have the most growth potential.
The VA market is eventually expected to stabilize. In the interim, there is no good reason not to buy VAs if you have a long-term horizon, annuity experts say, because they are the only annuity fully invested in the stock market and so have the most growth potential.

Here is a news flash in case you are like most people and have not been following annuity sales trends:

Sales of variable annuities, the most popular annuity, are likely to drop 15 to 20 percent in 2016 and an additional 25 to 30 percent in 2017 as broker-dealers adjust to the requirements of the Department of Labor’s conflict-of-interest rule, and in particular to the rule’s so-called “BIC” Exemption, which applies to variable and fixed indexed annuities.

These rules require broker-dealers to clearly show prospective retiree clients that the purchase of VAs are in their best interest.

This prediction — made recently by the LIMRA Secure Retirement Institute, which conducts market research for life insurers — marks the latest signal that sales of variable annuities will probably continue a non-stop decline that started in 2015 and were spotty before that. Sales of variable annuities have intermittently been falling since 2011 and have never regained their peak in 2007, when gross sales were $179.2 billion. Last year, VA sales were slightly above $130 billion.

To be sure, VAs have their strengths, annuity pros point out. They remain the only annuity in which an investor can put a virtually unlimited amount of after-tax (non-qualified) savings for tax-deferred growth. They are also the only annuity sold through the securities-licensed broker-dealer channel. More than 70 percent of VAs in the first quarter were sold by captive agents or by independent advisors affiliated with broker-dealers.

Nonetheless, the VA share of the market has been shrinking relative to soaring sales of fixed indexed annuities. VA sales are now 45 percent of the market, a 20-year low, compared with 60 percent just a year ago.

What’s going on?

The stock market suffered a sharp 10 percent drop in January and the first part of February, hurting first quarter VA sales, said LIMRA SRI Director Todd Giesing. “This was the second sharp drop in equities since August of 2015,” Geising said. “We’ve seen variable sales drop when equities go down, but not this much. Even during the financial crisis, sales didn’t fall this low.”

Prospective VA buyers should not be concerned, however. The VA market is eventually expected to stabilize. In the interim, there is no good reason not to buy VAs if you have a long-term horizon, annuity experts say, because they are the only annuity fully invested in the stock market and so have the most growth potential. Market volatility has scared off VA investors, but, so far, the market has consistently rebounded after each sell-off. Even if we enter a new bear market, market experts say, the market is highly likely to eventually rebound to new highs, as it has always done in the past

In any case, VA fans will have to hold tight for a while, said Kevin Lofreddi, senior product manager for variable annuities at Morningstar Inc. He said that the U.S. Department of Labor conflict-of-interest rule, which was issued in April, was issued too late to impact first quarter variable annuity sales. But the rule will hurt VA sales going forward, an additional source of weakness, he said. Lofreddi said the rule will also hurt fixed indexed annuity sales, with a lag.

Here is a snapshot of the sales trends among other types of annuities:

  • First quarter sales of fixed annuities jumped 48 percent, to $32.3 billion. All fixed annuities experienced double-digit growth, compared with the year-ago quarter. Fixed indexed annuity sales jumped 35 percent, to $15.7 billion, with all of the top 10 underwriters reporting increases. Fixed indexed annuities have now experienced eight consecutive years of positive growth.
  • Sales of book value and market-value-adjusted fixed-rate deferred annuities, which often spike when equity market volatility spikes, were up 90 percent in the first quarter.
  • Fixed immediate annuity sales were up 25 percent in the first quarter, to $2.5 billion.
  • Deferred income annuity (DIA) sales jumped 29 percent in the first quarter, to $729 million. Twelve percent of these sales were sales of Qualified Longevity Annuity Contracts (QLACs), and experts predict QLAC sales will see additional increases in 2016.
  • Overall, the annuity industry is shrinking in terms of net new sales. Net flows in the first quarter of 2016 were negative 1.9 percent. Net flows were negative 5.2 percent in 2015 and 3.3 percent in 2014.

Longer-term, LIMRA SRI’s Giesing said sales of VAs will improve and the other types of annuities will grow even more briskly.

“When you look at why people turn to annuities, it’s because they are the only investment source offering guaranteed income,” he said. “This attracts people, and it won’t change.

“Half of annuity sales in 2015 had an income component,” he added. “And the ranks of retirees will swell. Today, there are 50 million. We expect the number to reach 66 million by 2025. More people will buy annuities as more people retire without the backstop of defined benefit pensions.”

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