Why Fixed Annuities Are Smokin’ Hot

Fixed annuities were smoking in second quarter. Smoking hot, that is. According to the latest individual annuity sales estimates from LIMRA Secure Retirement Institute (LIMRA SRI), total fixed annuity sales hit $25.2 billion in second quarter, up 34 percent from the same period last year.

For the first half, fixed sales totaled $49.1 billion, up 39 percent from first-half last year.

Variable annuities did not fare as well, in terms of growth. Those sales fell 5 percent in second quarter compared to last year on sales of $36.2 billion. On a first-half basis, they fell 4 percent on sales of $70.4 billion compared to last year, according to LIMRA SRI.

The results for both annuity sectors echoed those of first quarter. That’s when fixed sales rose by a stunning 43 percent over the same year earlier quarter on sales of $23.5 billion, while variable annuities fell by 3 percent on sales of $34.2 billion.

A new annuity dynamic

The performance in both product lines brings to the foreground what may be a leading dynamic in the annuity business, a dynamic forged by retirement demographics.

Time was when fixed annuities made their strongest gains when interest rates were high or rising, and that variable annuities soared when the stock market was making big gains. Yet that was not the case this year.

In both second and first quarter, fixed annuity sales climbed higher and higher, even though interest rates did not go up. In fact, interest rates fell; for instance, the 10-year bond rate dropped from 3 percent at year-end 2013 to not quite 2.6 percent at the end of second quarter. Similarly, variable annuities declined even though the stock market reached new highs in both quarters (the Dow closed second quarter at 16,851, yet another new high).

The throng of the eldest baby boomers, now in their late 50s and early- to mid-60s, may account for much of the fixed annuity gain this year. Industry research shows that those who are at or near retirement are more interested in financial products with guarantees than with the opportunity to reap big gains in the stock market (absent of guarantees).

Other factors were also at work in both sectors. These include the continued downsizing of variable annuity production by some carriers, the debut of new derisked variable annuities by other carriers that some sales agents deemed as unattractive, the proliferation of a wide assortment of fixed products geared for today’s market, and a generally more optimistic business environment this year.

But those factors are in addition to the impact of rising demand for guarantees among older buyers, especially older boomer buyers. For instance, in an Allianz Life survey last year, 87 percent of boomers aged 55 to 65 indicated they felt more attracted to a financial product with 4 percent guaranteed return than a product offering an 8 percent return that could lose value due to market downturns.

On a dollar comparison basis, variable annuities did outperform fixed annuities in second quarter, as per usual. However, the performance gap between variable and fixed has narrowed.

For instance, in second quarter 2014, variable policies sold $36.2 billion versus the $25.2 billion sold in fixed policies, according to LIMRA SRI numbers. That made for a gap of $11 billion. By contrast, in second quarter last year, the gap was $19.2 billion ($38 billion for variable versus $18.8 billion for fixed). And in second quarter 2008, before the Great Recession hit its nadir, the gap was $16.4 billion ($42.2 billion for variable versus $25.8 billion for fixed).

Many producers have been accustomed to identifying themselves as fixed or variable annuity specialists. But this contraction of the sales gap between fixed and variable may, if it continues, spur identification simply as annuity professionals, especially if dual licensed, without regard to annuity type. Such a shift could minimize old rivalries between the two groups, with neither one claiming to have the best, most flexible, nor most suitable annuity solution for annuity-buying customers.

So, what are the totals? According to LIMRA SRI, the total annuity production for second quarter 2014 came to $61.4 billion, up 8 percent from the $58.8 produced in second quarter last year. “This is only the second time we have seen quarterly sales over $60 billion since the third quarter of 2011,” Todd Giesing, LIMRA SRI senior analyst, said in a statement.

Total annuity sales increased on a year-over-year basis too, by 10 percent to $119.5 billion from the same period last year, according to the report.

Fixed annuity insight

The LIMRA SRI data provide plenty of insight into which types of fixed products were top sellers in second quarter. Measured by growth, the big winner was the fixed index annuity (FIA) product line.

Those sales jumped 40 percent over the same period last year, set a new quarterly record of $13 billion, and won a 52 percent share of total fixed annuity sales, LIMRA SRI reported. This is the first time that quarterly FIA sales have accounted for more than 50 percent of total fixed annuity sales, the researcher said.

On a first-half basis, the FIA results followed a similar upward trajectory. FIA year-to-date production grew to $24.3 billion, a 41 percent increase over first-half last year, according to LIMRA SRI.

By way of comparison, in second quarter 2008, FIA sales came to just $6.9 billion, according to LIMRA figures. The star-shine in that quarter, on the fixed side of the business, was fixed deferred annuities, which sold $22.3 billion. Now the tables have turned. Fixed-rate deferred annuities (book value and market value adjusted) produced only $7.4 billion second quarter this year — nearly half the $13 billion reported for FIAs in the same quarter.

Industry proponents take the steady growth of FIAs as a signal that the policies are attracting buyers who want upside potential with downside guarantees. They have reason; many FIA buyers are boomers. In first quarter 2014, for instance, Wink Inc., reported that the average age of FIA buyers was 64.

Other figures in the LIMRA SRI sales report reinforce the notion that fixed annuity sales are trending toward boomers with an eye on retirement income guarantees. For example:

Deferred income annuity (DIA) sales reached $710 million, up 33 percent from second quarter in the prior year. On a first half basis, DIA sales hit $1.3 billion, up by 43 percent from last year.

Single premium immediate annuity sales rose 37 percent to $2.6 billion, and not just from one carrier. On a first-half basis, these sales reached $5.1 billion, up 42 percent year over year.

Guaranteed living benefit features, when available, were elected on 72 percent of FIA sales. (They were variable annuities, too, with an election rate of 78 percent, when available.)

7 facts about annuities you should know

By Warren S. Hersch

 

August 1, 2014 • Reprints

Annuity sales in 2013 totaled $220.9 billion, of which $209.9 billion were attributable to deferred annuities.

How is the rise in life expectancy impacting financial needs in retirement? Which annuities nabbed the lion’s share of product sales last year? And why are the wealthy—particularly the most affluent among them—buying annuities, given their other substantial assets?

Answers to these questions, among many others, are forthcoming in the Insured Retirement Institute’s “IRI Fact Book 2014.” The 198-page report, an all-encompassing guide to information, trends and data in the retirement income space, explores the state of the industry, annuity product innovations, and solutions for generating immediate and future income needs.

The report also details consumer use and attitudes towards annuities, spotlights trends among baby boomers and generation X women, examines boomer expectations for retirement this year, and delves into the regulation and taxation of annuities.

The following is a sampling of key findings unveiled in the report.

Fact 1: Americans are living longer amid rising healthcare costs.

The IRI Fact Book 2014 reveals a significant increase in the life expectancy of 65-year-olds over the past quarter century. In 2010, the average life expectancy for a 65-year-old male was 82.7. This compares with 79.1 years in 1980.

“While an increase of three years may not seem dramatic over a lifetime, it can have a significant impact on one’s retirement security,” the report states.

To make its point, the report cites the example of an individual with annual expenses of $50,000 in retirement. Expenses for a 65-year-old living 14 years in retirement would total $700,000.  Assuming this person lives 17 years in retirement, the additional three years of expenses would bring the total to $850,000, a 21 percent rise.

The report adds that healthcare costs for the average 65-year-old will be $250,000 over a 20-year retirement and nearly $500,000 over a 30-year retirement.

Fact 2: Deferred and variable annuities accounted for most annuity sales in 2013

Annuity sales in 2013 totaled $220.9 billion, of which $209.9 billion were attributable to deferred annuities and $11.0 billion to immediate annuities. Variable annuities accounted for $142.8 billion, whereas fixed annuities hit $78.1 billion.

Assets under management in annuities reached a record-high of nearly $2.6 trillion.

“While some companies have slowed down or eliminated new annuity sales, there has been an influx of private equity firms entering the annuity market, specifically by purchasing interests in fixed-indexed companies, as well as variable annuity blocks,” the report states. “Additionally, companies are innovating with new products that are less capital-intensive, which may increase the capacity at certain companies.”

Fact 3: Sales of fixed immediate income annuities have more than doubled since 2003 and were up 20 percent in 2013 alone

The report expects sales of fixed immediate income annuities to continue to increase. Among the reasons why: Lifetime payouts remain attractive in the current low interest rate environment due to survivorship credits. And these credits will become more appealing as interest rates rise.

The report notes also that that federal government has been encouraging  employer sponsors of defined contribution retirement plan, such as 401(k)s, to offer these annuities as options for retiring employees.

“Their popularity is likely to rise as the public becomes more familiar with them in this context,” the report states. The research adds that carriers are “adding liquidity and inflation-protection features to existing products, or introducing new ones with these features, to overcome advisors’ and consumers’ historic objections to the products.

Fact 4: In 2013, 72 percent of variable annuity sales were in products offering a guaranteed minimum withdrawal benefit (GMWB) or guaranteed minimum income benefit (GMIB)

The report observes that the top-selling variable annuity products are consistently sold or offered with a GMWB or GMIB option; and that about 70 percent of sales are reported in qualified plans (i.e., sales wherein tax-deferral is a function of the plan, not the product.)

Fact 5: More than one in three (36 percent) investors have an annuity within their investment portfolio.

The research observes, however, that this percentage is down from the 42 percent of investors who reported owning an annuity in 2012. The use of fixed, fixed income and variable annuities is also down from 2012.

The research adds that owners of variable annuities are equally likely to be male or female (51 percent vs. 49 percent). Indexed annuity owners are more likely to be males (58 percent vs. 42 percent), whereas fixed annuity owners are somewhat more likely to be female (53 percent vs. 47 percent).

The study notes also that, in 2013, ownership of fixed annuities is greatest among the Generation X and Y affluent populations (62 percent combined). Older generations (those born in 1956 or before) are more likely to own fixed (60 percent) and variable (57 percent) annuities.

Fact 6: Familiarity with annuities and their benefits increases with wealth, as does the belief that annuities can diversity and protect assets.

The research reveals that 20 percent of investors with more than $5 million in investable assets say that they plan to purchase an annuity in the next year.

“While wealthier clients may be among the greatest annuity product advocates, they also are the group to most likely express skepticism over an insurer’s trustworthiness and ability to fulfill long-term guarantees,” the report states. “For these investors, an insurer’s financial strength ratings and communication process of how guarantees are competitive, yet prudently hedged and priced, are of utmost importance.”

Fact 7: Nearly half of households (43 percent) cite guaranteed monthly benefits as the primary reason for purchasing an annuity.

The research indicates that this reason is especially prevalent among investors with $2 million in investable assets. Investors owning investable assets between $2 million and $5 million place the greatest importance on potential account growth (41 percent). In contrast, the wealthiest investors (those with $5 million-plus in investable assets) want to insure portions of their assets (39 percent).

Other reasons cited by the wealthiest investors include:

● To generate a guaranteed payment each month in retirement (37.6 percent)

● To provide a potential for account growth (34.9 percent);

● To receive tax-deferral on earnings in the annuity (33.4 percent); and

● To set aside assets for heirs (32.8 percent)