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 2014 estimated U.S. fixed annuity sales were $91.5 billion, up 17.2 percent from 2013. This was the best year for fixed annuity sales since 2009. The standout was the second quarter with $24.3 billion; a 7.6 percent increase from the first quarter and the highest sales quarter since the second quarter of 2009. In the third quarter sales dipped 10.7 percent, but recovered a bit on the final quarter gaining 6.3 percent.
The greatest annual percentage gain was 45.6 percent as fixed rate annuity sales with a market value adjustment (MVA) increased from $6.7 to $9.8 billion. The greatest dollar gain occurred with fixed index annuity sales increasing by $9.2 billion to $48.0 billion. For the third year in a row fixed index and fixed income annuity sales set new sales records. (See Chart 1)
Product Trends
Two Allianz products alone accounted for 17 percent of fixed index annuity sales and 9 percent of total fixed annuity sales; these were Allianz 222 and Allianz 360. Each offered a compelling interest crediting story as well as offering potential growth for lifetime guaranteed income created through withdrawals. The New York Life Secure Team MVA Fixed Annuity ranked number three in sales and the New York Life Lifetime Income Annuity was in fifth place. In fourth place was the Security Benefit Life Secure Income Annuity. (See Chart 2)
There was a fade in sales as the year progressed and bond yields fell. Indeed, with the exception of fixed rate (MVA) sales, first half of the year sales exceeded second half sales for the other categories, but the decline for fixed index annuities sales was insignificant between the half-years.
Interest Rate Trends
The 10-year Treasury was exactly 1 percent lower at the end of January than it was a year earlier. The precise opposite of where most predicted it would be and where the economy implies it should be.
The U.S. economy has recovered from the 2008 crash. GDP set a new high. The S&P 500 has tripled and Nasdaq has almost quadrupled. The unemployment rate is 5.6 percent and the supply of labor is tightening, putting upward pressure on wages. By historical standards, the bond yield increases that started in the spring of 2013 should have the 10-year U.S. Treasury around 3.5 percent; instead it ended January at 1.67 percent.
This continues to be a weak recovery and confidence about the future is thin. Rates are low because businesses aren’t borrowing to expand. Rates are also low because the recovery in much of the rest of the world has stalled and investors are putting money into government bonds for safety, not yield. (See Chart 3)
In spite of a pricing environment indicating lower index annuity participation rates and lower fixed annuity rates, annuities remain attractive because the alternatives look worse. The best one-year certificate of deposit rates are barely over 1 percent, bond returns are low and if bond rates do rise, can turn negative, and gambling that the stock market’s run will extend for seven years is looking dicey. Even at lower rates, fixed annuities still offer the potential for more interest, protection from stock market loss, and a low opportunity cost when compared with bank instruments or doing nothing.
Best Selling Products by Channel
The top 10 selling products in the independent channel space are all fixed index annuities (FIAs). In the bank channel, although the top product is fixed rate (non-MVA), numbers two and three are FIAs.
The list of top selling annuities in the wirehouse/broker/dealer space depends on how you define the channel. Looking solely at the wirehouse space the top selling product was again a fixed index annuity and an FIA also headed the independent broker/dealer space. However, in the large regional broker/dealer segment the New York Life Secure Term MVA Fixed Annuity was the top seller for the second year in a row and the only FIA that managed to enter the top 10 was in 7th place.
Distribution Trends
In 2014 captive and independent agents were responsible for 54.3 percent of total fixed annuity sales; a drop from the 60.1 percent represented in 2013. Also in 2014 banks did 24.3 percent of sales with wirehouses and broker/dealers contributing 18.4 percent—up sharply from the 12.5 percent reported in 2013—and direct sales were at 3.1 percent. Fixed index annuities continued to gain serious traction in the wirehouse and broker/dealer channel accounting for 15.2 percent of 2014 FIA sales; a very sharp contrast to the 4.0 percent of sales the securities distribution channel represented in 2013 for FIAs. (See Chart 4)
A decade ago banks and broker/dealers were 3.8 percent of fixed index annuity sales totaling $0.77 billion. In 2014 banks and broker/dealers were 30 percent of fixed index annuity sales totaling $13.2 billion.
A decade ago fixed income annuity sales were $4.6 billion and a deferred income annuity (DIA) was something that used to be advertised in Life magazine telling consumers, “How you can retire on a guaranteed $400 a month.” In 2014 income annuity sales were $11.7 billion and DIA sales were more than $2.6 billion. (See Chart 5)
The Forecast
A year ago I said that overall bond rates would gradually increase in 2014 and that the bull market was nearing an end. Oops. I did say 2014 fixed annuity sales would be higher than 2013 and they were up 18 percent. What will happen for the rest of 2015?
I still see bond rates moving up, but it’ll be later in the year. The bull market is in its seventh year, but I can’t tell when it will end. One thing that does make me nervous is how calm everyone is. The St. Louis Financial Stress Index indicates no financial stress at all; in fact, it’s negative. The University of Michigan Consumer Sentiment Index shows Americans are feeling very copasetic about their jobs, debt and financial capabilities. The level of the Economic Policy Uncertainty Index indicates we feel just fine about the way Washington is handling things. It’s very quiet out there, perhaps too quiet.
