Bear market would bode well for fixed annuities: reports

Insurers will likely struggle to keep pace with the record annuity sales volume they saw last year – but things could turn around in short order, an industry lobbying group predicts.

Low interest rates are now hindering sales of fixed annuities, but demand for guaranteed-income products will only grow in the coming years as the vast number of baby boomers head into retirement, according to the Insured Retirement Institute.

“Long-term interest rates fell steadily throughout 2019 and ended the year at 1.92%. With rates more than 100 basis points below 3%, capacity, withdrawal rates on [guaranteed living withdrawal benefits] and participation rates on fixed indexed products are constrained,” the IRI said in a report last Friday. “While ending the year higher than a September low of 1.47%, rates need to move solidly higher for a sustained period in order to produce meaningful changes in annuity products.”

On the other hand, about 10,000 U.S. baby boomers turn 65 every day and that pace will continue until about 2033, the group wrote, citing predictions from the Pew Research Center.

The passage of the SECURE Act also bodes well for sales long term, IRI noted, citing the legislation's fiduciary protections for plan sponsors that incorporate annuities into retirement plans.

Last year saw record sales for annuity products as a whole, at $241.7 billion, with fixed indexed annuities selling well in the first part of the year and variable annuities ramping up after the first quarter. It was the best year for VA sales since 2008, according to a recent report from Limra’s Secure Retirement Institute.

That increase in VA sales was due in part to demand for a new type of product — registered index-linked annuities, which provide some protection from losses.

But FIAs will soon have their day, one research and consulting firm predicts.

Favorable conditions for those products — including better interest rates and a potential bear market — would give sales a big boost, as would increased sales through broker-dealers and new designs that would be appealing to consumers, according to a report from Cerulli Associates.

“FIAs should not be harmed greatly by Fed rate cuts, and if markets become volatile and or bearish, fixed annuities will once again serve as safe havens for risk-averse investors,” Cerulli wrote.

“The largest catalyst of growth comes from changing distribution dynamics,” the report said. “The independent broker-dealer channel experienced the largest 10-year gain in fixed annuity market share, at nearly 8 percentage points; regional broker-dealer market share has grown too, by almost 7 percentage points.”

Nearly 60% of insurance companies Cerulli surveyed recently said they expect sales through independent broker-dealers to increase by at least 10% over the next three years.

In accordance with that trend, insurers will need to bring more FIA products to the market that are compatible with fee-based practices, according to Cerulli.

This year, the Securities and Exchange Commission’s Best Interest Rule will likely affect annuity sales, at least briefly, as insurers tweak products and their process in order to comply when the new rule goes into effect in June, said Todd Giesing, director of annuity research at the Secure Retirement Institute.

Compliance will not be a major undertaking for insurers, given the practice they essentially had when the Department of Labor’s fiduciary rule went into effect. That Obama-era rule, which was vacated by a federal appeals court, was expected to heavily weigh on certain annuity sales for years — though the rule’s repeal bodes well for insurers, according to Cerulli.

“The threat of the DOL rule had been a key reason for reduced sales, especially into VAs and FIAs,” Donnie Ethier, director at Cerulli, said in a statement. “The passage of the SECURE Act may open the door for further growth.”

VA sales slumped in the wake of the 2008 financial crisis as the optional guaranteed benefits sold on those products became too costly for insurers to provide, at least at levels they offered before the recession. Some insurers exited the VA market, some dangled buyback offers before contract holders, and many took steps to reduce their sales volumes, such as hiking prices or reducing the richness of guaranteed benefits.

While VA sales fell, FIAs were flying off the shelves. Those products represented 57% of all fixed annuity sales last year, according to Cerulli.

“Bolstered by the overall performance of index strategies, as well as designs offering greater transparency (e.g., surrender charges, participation rates), FIAs allow insurers to both accumulate assets and keep assets in place to sustain profits,” Cerulli wrote.

FIA sales are on track to outpace those of VAs by 2023, Cerulli predicted.