December 31, 2013 by N/A
Higher taxes may drive interest in variable and indexed
annuities; potential of rising rates could inspire new products.
Next year could be a big one for variable and indexed
annuities, both in terms of sales and product development, as new tax and
interest rate realities sink in.
This year set what appeared to be a perfect backdrop for
annuity sales and development, with the S&P 500 up 28.16% year-to-date
through Dec. 23. Interest rates, meanwhile, experienced a spike during May and
June – which bodes well for product development – but the Federal Reserve has
indicated it will keep its benchmark interest rate low, particularly if
projected inflation remains below its 2% goal. Low rates make indexed annuities
appear attractive compared with other interest-rate-based products, such as
certificates of deposit.
Sales for 2013, however, tell a slightly different story.
Variable annuity sales were relatively flat throughout the year: $34.2 billion
in the first quarter, $36.9 billion in the second and $34.7 billion in the
third, according to Morningstar Inc. Meanwhile, indexed annuities steadily
climbed: $7.8 billion in sales during the first quarter, $9.2 billion in the
second and $10 billion in the third, according to data from annuities and
insurance research company Wink Inc.
Expect to see greater interest from clients in annuities of
both varieties as they grasp the reality of larger tax bills come April.
“The tail winds are with variable annuities because of the
shift in [capital gains] tax rates,” said John McCarthy, product manager of
annuity solutions at Morningstar.
Going into 2014, expect a more bifurcated variable annuity
market, wherein clients can either prioritize investing for big gains or they
can seek lifetime income – but not both.
“Jackson National [Life Insurance Co.] is the pioneer in
promoting variable annuities without living benefits,” said Kenneth P. Mungan,
financial risk management practice leader at Milliman Inc. “They showed that
advisers and clients see real value in that offering.”
Jackson, now the biggest seller of variable annuities, sold
$15.5 billion during the first nine months of the year, with about $3 billion
of that coming from its Elite Access variable annuity without living benefits.
Meanwhile, Jefferson National, a longtime seller of variable annuities without
living benefits, this month added 23 new investment options, bringing its total
to nearly 400 funds.
As far as variable annuities for income benefits, look for
more risk-managed investment options within annuities, either in the form of
managed-volatility funds or asset transfer programs.
Mr. Mungan noted that this year’s rising market won’t deter
the use of products with risk-managed funds – which temper market declines but
limit sharp increases. “The retirement-oriented investor isn’t sitting fully
allocated to equities today,” he said. “Everyone focuses on the headline number
of market performance, but for retirement-oriented investors, that’s not tuned
in to their needs.”
He added that since these retirement-focused clients prefer
seeing steady account balances, managed-volatility funds could also be a
welcome addition to variable annuities without living benefits.
On the indexed-annuity front, Sheryl Moore, chief executive
of Wink, predicts seeing more companies enter the space and greater traction
for indexed annuities among banks and wirehouses.
Indeed, Allianz Life Insurance Co. of North America is
already a significant player among the indexed-annuity set and has launched a
line of products just for broker-dealers and wirehouses. Shorter durations
within the five- to seven-year range tend to be the norm for indexed annuities
sold in the wirehouse and broker-dealer channels.
Banks and wirehouses are gradually picking up more sales of
indexed annuities, too. Ms. Moore noted that in the third quarter of 2012,
independent agents accounted for 90% of sales, while banks made up 7% and
wirehouses represented 1%. A year later, independent agents made up 80% of
sales, while banks accounted for 11% and wirehouses 2.5%.
“If rates stay low, indexed annuities are a great
alternative [to certificates of deposit] for those bank reps,” Ms. Moore said.
She projected overall indexed annuity sales for 2014 to hit $37.8 billion.
Year-to-date through the third quarter, those sales were at $27.1 billion.
“We’re seeing a drive of sales through banks, registered reps and wirehouses,
and that will continue to escalate as nontraditional insurers [those that are
new to the indexed-annuity business] get into the market,” she said.
On the product development front, Ms. Moore predicted that
carriers will ramp up their living benefits, adding fancier features such as
payment checks that can increase based on interest rates. Development in
guaranteed-minimum death benefits will also pick up, albeit slowly. “The
low-interest-rate environment isn’t conducive to pricing on those benefits, but
we will probably see more of those features as rates pop up,” she said.
