The author would like to thank Jeremy Alexander and Monika Hunsinger of Beacon Research for allowing access to their comprehensive store of annuity sales data and granting permission for a portion of this research to be shared.
Data for this article was drawn from the Beacon Research “Fixed Annuity Premium Study,” the only ongoing study to report and analyze U.S. fixed annuity sales at a product level. The study reports sales data provided quarterly by participating insurance companies as well as results reported in statutory filings and other publicly available sources. Beacon checks this data for general reasonableness, but does not perform independent audits. Beacon uses this data to estimate overall sales and sales by product type.
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Overview
For calendar year 2013 estimated U.S. fixed annuity sales were $78.1 billion, up 16.6 percent from 2012. The reasons for the growth were threefold: 1) bank rates on money market accounts and certificates of deposit continued to be miserly, 2) the attractiveness of guaranteed lifetime income to boomers resulted in increased deferred income annuity sales as well as strong sales of guaranteed lifetime withdrawal benefits on fixed index annuities, and 3) bond yields moved up sharply in the second quarter, making annuity crediting rates more attractive. After declining for three straight quarters, second quarter fixed annuity sales jumped 14.6 percent over first quarter 2013 sales, third quarter sales leaped 31 percent on top of the second quarter, and fourth quarter sales were 4.7 percent higher than those of the third. All in all, fourth quarter 2013 sales were 45.2 percent higher than fourth quarter 2012 fixed annuity sales.
Fixed index and fixed income annuity sales set new records in 2013. (See Chart 1.) Fixed annuity sales were $38.7 billion, while fixed income sales were $11.0 billion—the first double-digit billion year ever. Fixed rate annuity sales, both non-MVA and MVA (market value adjustment) were $28.3 billion, sharply up from the $23.6 billion of the previous year, but far below the record year of 2008, when a combination of falling bank rates, stock market turmoil and strong multi-year guaranteed annuity yields resulted in $71.6 billion of fixed rate annuities purchased.
Product Trends
For a product that didn’t exist three years ago, deferred income annuities (DIAs) had a strong 2013 posting of more than $2.1 billion in sales. Indeed, the New York Life Lifetime Income Annuity was the second top-selling fixed annuity and only missed first place by a smidge. However, the impact of the DIA product is greater than the numbers represent. DIAs have caught the imagination of the financial media, and for the first time many are suggesting that both immediate annuities and deferred annuities—in the form of DIAs—have an important role to play in retirement planning. In spite of the lowest life payout factors ever, immediate annuity sales are posting strong gains. (See Chart 2.)
Fixed index annuities (FIAs) suffered sales slippage in the last half of 2012 and early 2013, but strongly rebounded as rising bond rates enabled interest caps to be increased last summer. The end of the year sales were further helped by the introduction of new indices used to calculate credited interest, and this resonated well with agents. In addition, the lifetime withdrawal benefit riders available on many FIAs guarantee growth of a future income that cannot be stymied by the next economic downturn. These peace-of-mind features continue to attract buyers.
Interest Rate Trends
Fixed rate annuity sales were also helped by rising bond rates, and when bond rates resume their upward trek, fixed rate sales will continue to strengthen. However, sales will be more affected by what is happening in other interest-yielding categories.
From 1981 to 2011, long term bond yields fell from 13 to 3 percent, and this 10 percent decline produced very strong returns for bondowners. However, when overall bond yields go up, the value of existing bonds goes down. In 2013 the only bond groups that had positive years were junk bonds and very short maturity bonds. It is obvious that the next 30 years will produce lesser returns because bond yields cannot fall to a negative 7 percent, even if interest rates stay the same. It is much more likely we will have a rising interest rate period. If we have a period in which bond values are declining, there is merit in transferring the risk of principal loss to the insurance company and buying an annuity that protects both principal and interest credited. (See Chart 3.)
In every previous interest rate cycle, short term interest rates have responded more quickly than long term rates. Since annuity rates are derived from long maturity bonds and rates paid on bank savings come more from short term lending, this means bank rates go down faster when rates are falling, giving annuities a competitive advantage, and go up faster when rates are rising, causing problems for annuities. However, this time around even though bond yields have spiked since the spring of 2013, the average rate paid on a certificate of deposit declined.
Why? The main reason is that the 2007-2008 financial crisis caused regulators to pass new rules requiring banks to keep higher reserves so they would be less leveraged. Money kept in reserves dilutes returns, meaning less money is available. The other factor is that over the last 15 years banks added on a number of customer fees, and over the last couple of years regulators have either ended or put limits on the fees that can be charged. Both of these events mean banks have less money to pay out as interest. The final reason for flat bank yields is that customers are not fleeing the banks. Quite the opposite, the amount in money market accounts is at record levels despite low rates.
As bond rates increase, the value of existing bonds will go down, bank yields will be flat or barely budge upward, but fixed rate annuity yields will increase. The competitive position of fixed rate annuities will continue to improve, and this will drive increased sales.
Best Selling Products by Channel
The top 10 selling products in the independent channel space are all fixed index annuities, as are eight of the next group of 10 top selling products. In the bank channel, the top two products are fixed rate (non-MVA) as are three other annuities in the top 10. Also in the top 10 for the bank channel are four FIAs and one fixed income annuity.
The list of top selling annuities in the wirehouse and broker/dealer (BD) space depends on how you define the channel. Looking solely at the wirehouse space, the top selling product was the FIA Pacific Life Pacific Index Choice; in the regional broker/dealer column the top selling product was also the Pacific Life Pacific Index Choice. However, in the large regional broker/dealer segment, the New York Life Secure Term MVA Fixed Annuity was the top seller, and no FIA made it to the top ten. In all securities representative channels, fixed income annuities were well represented in the top ten.
Distribution Trends
In 2013, captive and independent agents were responsible for 60.1 percent of fixed annuity sales, banks did 23.4 percent, wirehouses and broker/dealers contributed another 12.5 percent, and direct sales were at 4 percent. All in all, not terribly different from how the pattern looked in 2010, 2011 and 2012—with banks still off the 30 percent-plus share they held in 2008 and 2009. However, one product showed a distinct trend. The bank share of fixed index annuity sales rose 62 percent from 8.1 percent to 13.1 percent. The bank FIA market share more than doubled from 2010, with actual sales increasing 160 percent. There are two main reasons for the increase. (See Chart 4.)
One reason is the one stated previously—the rates paid on bank CDs continue to be very low relative to the interest potential of an FIA, combined with little downside. If a saver moves money from a CD yielding 0.3 percent to an index annuity with a 3.0 percent interest cap and the index goes down, the opportunity cost of moving from the CD is only 0.3 percent, but the upside is earning ten times more interest in the annuity. The other, perhaps more important reason is that FIAs have lost any taint they might have had in years past. FIA products today have shorter average surrender periods and more consumer-friendly features than a decade ago, and stories of FIA sales abuses are few and far between. My conversations with banks indicate they feel comfortable with offering the products.
As mentioned, fixed income annuity sales have held steady or increased in all channels except one. A decade ago independent agents sold half of the immediate annuities; in 2013 their market share was 11.2 percent. A major reason for the declining share was increased selling by other channels—primarily captive agents—but I believe the other reason for the decline in independent agent immediate annuity sales is that they are selling deferred annuities with lifetime withdrawal benefits instead. (See Chart 5.)
The Forecast
The result of rising bond rates was significantly improved index interest caps and better fixed rates. This pattern will continue in 2014, with overall bond rates gradually increasing and 10-year treasury rates having a more volatile ride as the spread continues to decline between treasury and high-grade corporate bond yields.
The bull market is nearing an end. This is the fifth longest bull market in more than a century. From March 2009 to early May 2014 the S&P 500 is up 178 percent, the Dow is up 153 percent, and the NASDAQ is up 224 percent. The S&P 500 and Dow are roughly 16 percent higher than their previous peak, and NASDAQ is 45 percent higher. There will be a bear market; the only question is how bad will it be. When the bear market does happen it will be even more difficult to disparage a financial tool that didn’t lose money when others did.
The forecast for 2014 is higher rates, higher caps, higher sales and more product innovation.
