Indexed annuities are turning out to be a bright spot in an otherwise depressed environment for annuity sales.
Sales of indexed annuities, in which returns are based on the performance of a stock market index, increased by 14% to $8.1 billion in the first quarter, according to data from LIMRA.
Meanwhile, sales of fixed and variable annuities declined by 8% to $54.8 billion.
Researchers think that the decline is attributable to less generous variable annuity living benefits and the ultralow-interest-rate environment, which reduces the income streams that fixed annuities can deliver.
Independent agents — including broker-dealer representatives who sell insurance through an insurance agency or an independent marketing organization — were responsible for 89.6% of indexed-annuity sales during the first quarter, according to AnnuitySpecs.com. Banks accounted for 6.7% of sales, while 1.4% came from wirehouse reps.
“Indexed annuities aren't as attractive as they were several years ago, but they are still attractive compared to CDs,” said Scott Stolz, president of Raymond James Insurance Group.
The broker-dealer, which sells $15 million to $20 million in indexed annuities per month, has seen sales at the higher end of that range in the past two to three months, he said.
Despite being tied to equities, indexed annuities aren't entirely immune to low interest rates, which could affect the product's attractiveness in the months ahead.
Although returns for indexed annuities are linked to the stock market, insurers invest in bonds to fund the product. Low rates have led some insurers to cut caps, or the maximum amount of interest credited, as well as commissions for brokers.
“I have a strong view that we have to match current rates on annuities with current rates on the market for investments,” Jay Wintrob, chief executive at SunAmerica Financial Group, said at a conference in New York last week.
“We have to look at all levers in products, including renewals and guaranteed-minimum interest rates,” he said. “We don't think you can just make it up in volume in the annuity industry.”
Broker-dealers are noting the low-interest-rate drag on sales.
“Since so much of what an insurance company does is predicated on interest rates, even caps on indexed products have come down over the past 10 months, thereby slowing indexed sales here,” said Bernie Gacona, director of annuities at Wells Fargo Advisors LLC.
In addition, many new indexed annuities have reduced their surrender periods to between five and 10 years, down from 15 years in the past.
Eyebrows have been raised among regulators about some annuities' use of customized or obscure indexes as reference points.
“New companies are coming in with more strategies using different indexes that aren't as well-known to the customer. As a regulator, this causes me concern,” said Jim Mumford, first deputy commissioner and securities administrator in Iowa.
Indexed annuities offer more-attractive rates than other fixed-income investments. What's more, clients can add guaranteed-lifetime-withdrawal benefits — including roll-up rates as high as 8% — that are nearly extinct on the VA side.
Life insurers are able to offer the richer living benefits of indexed annuities because the product is less risky for them than VAs.
In a VA, buyers of living benefits increase their income benefit base when the market fares well. For carriers, this is risky because if the account value declines, the insurer is still obligated to make income payments based on the market high.
With indexed annuities, carriers limit the amount of an index's gain that the insurer can credit to the annuity, based on participation rates. Interest rate caps limit the rate of interest the annuity earns.
Because the indexed annuity doesn't have the same upside potential and downside risk as a variable annuity, the likelihood that a policy owner's account will end up underwater is lower — which reduces the insurer's risk related to hedging for market volatility.
A VIABLE ALTERNATIVE
Nevertheless, for advisers and agents who have seen withdrawal and roll-up rates on variable annuities decline to 5%, rates of 6% or higher on indexed annuities are attractive and an easier sell, even without the same upside.
“In the independent-agency channel, indexed sales are guaranteed- lifetime-withdrawal-benefit sales,” said Judith Alexander, director of marketing for Beacon Research Publications Inc., an annuity research firm. “In banks, indexed annuities are sold on rates against CDs.”
At Raymond James Financial Services Inc., indexed-annuity sales outpace fixed-annuity sales by 2-to-1.
“Assuming we continue to have supply from the insurers, we don't expect it to change,” Mr. Stolz said.
However, some insurers are signaling that they are reaching the limit of their ability to fund new sales.
“One of the challenges with success is that sales can be too strong,” Brian Griggs, vice president of annuity distribution at Fidelity & Guaranty Life Insurance Co., wrote in an April notice to marketing organizations.
The notice went on to announce the carrier's decision to suspend requests for new-agent contracting in an effort to slow volume.
“We manage to a capital plan that limits the volume of sales, and early indications are that we're on pace to far exceed our sales plan,” he wrote.
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