Jack Marrion

There was a recent study that measured the average honesty of the citizens of 15 countries using sample groups in each and then testing them on how they reacted to different situations. First, all countries had significant numbers of dishonest people. Great Britain had the fewest dishonest citizens and U.S. citizens ranked less dishonest than most. Two countries ranked as most dishonest, but rather than naming names, I’ll let interested parties copy the link at the end of this article and they can go and download the study.

Although the topic is honesty, I’m not doing a sermon on truth but about decision-making biases. Dishonesty can be caused by cognitive biases. For example, if you have a negative stereotype about a group of people you are more likely to be dishonest with the particular group (or not engage with them at all).  Or, if you believe that people are generally dishonest, you are more likely to be dishonest first—engaging in a “do unto others before they do it to you” inverse golden rule. 

The damages caused by these biases may mean that an economic exchange between a buyer and seller does not take place because there is little trust. On a much bigger level, a nation of people may suffer because their trade and economic growth will be limited. Indeed, there are some that believe the reason why certain countries fly and others flail is because people accept that certain cultures will and do keep their word while others won’t.

A history of trust is a major reason why it is often difficult to get a prospect to leave their current advisor or agent and buy your annuity or insurance. The prospect knows how honest their current advisor is, but he doesn’t know you. This is why referrals and recommendations from people the prospect trusts are so very important. A referral envelops you in the cloak of honesty that surrounds the referrer and creates instant trust.

What if this isn’t a referral?
Disclosure, transparency and strong institutions discourage dishonesty and encourage buying. In this world, letting the prospect know that, as an agent, you are licensed by a strong institution—the state insurance commission—to act as an agent and that the state can and will revoke the license of agents using “fraudulent, coercive, or dishonest practices, or untrustworthiness in the conduct of business” (to quote the insurance statutes of many states) may help build trust. Transparency of potential costs or negatives, as well as how the agent financially benefits from the sale, helps build trust.  The aside here is—do not fear transparency of showing the buyer what you are paid.  In every case I’ve witnessed, sales increased after commissions became visible. 

Insurance and annuity disclosures create more sales because the prospect feels any dishonesty is harder to hide, providing the aim is for fair disclosure and not full disclosure. Fair disclosure means telling the prospective buyer of features or conflicts of interest that could negatively affect the buyer; this is the intent of all of the disclosure laws passed. Full disclosure can also do this, but too often full disclosure diminishes trust by burying the buyer in pages of minutiae so they cannot find the truth.  

The international study found that those groups that are more honest achieve greater financial success. Since a prospective buyer cannot gauge  how honest you are—unless this is a referral—talk to them about what is required to get and keep an insurance license and then provide fair disclosure. 

Study URL: http://d.repec.org/n?u=RePEc:uea:ueaeco:2015_01&r=neu

Almost twenty years ago Clayton Christensen’s book, The Innovator’s Dilemma, said the reason many established companies fail is because they don’t or can’t respond to disruption. Most of the disruption cited was caused by technology (e.g. cell phones replacing the need for Kodak cameras and film), but sometimes politicians and regulators were the cause. 

Before 1 May, 1975, commissions on stock trades were fixed and rather profitable—a stockbroker could make a nice living trading stocks for his customers. However, on that date the SEC stated that stock trades could be negotiated and discount brokerages such as Charles Schwab & Co., Inc. became major players. To maintain their income, stockbrokers were forced to vastly increase the number of trades conducted, specialize in areas that allowed them to maintain higher margins (such as initial public offerings), expand their offerings or change occupations. Regulatory disruption forever changed distribution in the securities industry. Regulatory disruption has already changed distribution in the fixed annuity channel and these changes will dramatically increase over the next few years. Although the use of annuities will flourish as never before, the disruption to marketing organizations (MOs) and agents will be profound.

A Snowball Moving Downhill
One recent disruptor was the current administration supporting the purchase of annuities. Partially because of this, fixed immediate annuity options are gradually appearing in more defined contribution plans and qualified longevity annuity contracts (QLACs), allowing at least a portion of qualified monies to not be subject to required mandatory distributions at age 70 ½.  Supporting annuities should be a good thing for MOs and agents, but in this case the annuities are, and I believe will, largely be bought on an institutional basis without an agency or agent in the middle. Thus, there will be billions in new annuity purchases generated and zero agent commissions. Indeed, the agent now has a new competitor for the retiree annuity purchase—the retiree’s retirement plan—and the retirement plan can probably offer better pricing due to economies of scale.    

The adoption of the proposed Department of Labor (DOL) fiduciary regulation would cause the avalanche to finally hit, but this disruptive regulator snowball has been heading towards agents and MOs for years. The attention started when annual sales of fixed index annuities (FIAs) soared from $14 billion in 2003 to $23 billion in 2004. The increased visibility and potential oversight revenues culminated in the passage of SEC Rule 151a. The rule was neutered, but the result was increased supervision and suitability requirements. 

If the DOL proposal is implemented the supervision of agents, especially those selling fixed index annuities, becomes a focal point. Determining whether to contract an agent will be based as much on the potential liability and cost the agent creates as on the sales generated. Relationships with agent recruiters (MOs) will be based as much on how much of the liability can be transferred as on how many agents can be recruited. In this regard, broker/dealers and registered advisory firms are a better fit because they are already directly supervising most aspects of the representative/agent’s business and therefore lower carrier risk. There will be less of a need to have an MO recruiting agents and providing product training, unless the MO can also take over some the carrier’s supervisory responsibility.

The fixed annuity distribution model is shifting; the only real questions are how fast and how far. The annuity establishment can fight against these disruptions and should—the DOL proposal being a prime example—because disruptions may be stayed. Witness Rule 151a. There are a variety of ways to take the edge off the effects of disruption or adapt to the new world for both agents and marketing organizations. Many will prosper. The only bad plan is to not plan at all for possible disruption. 

LIMRA estimates the shortfall between the life insurance benefits that are needed and actual life insurance owned is $16 trillion with life insurance ownership at a 50 year low. Some reasons given for the decline are the growth of alternative financial tools for asset accumulation competing with life insurance, the growth of two-income households encouraging the belief that a surviving spouse wouldn’t need life insurance, and a shift towards term insurance that lessened the incentive for agents to actively sell life insurance.  None of these reasons are going away. It isn’t all doom—LIMRA also says whole life policy sales for the first half of 2015 were running 9 percent ahead of last year. However, many of those that most need the protection of life insurance aren’t buying it. What can be done?

Part of what can be done is being done.  Carriers and industry associations are continuing to work on educating the public on the need for insurance. Showing the dollar and cents reasons for buying life insurance does result in sales when a lack of education is the stumbling block. In addition, raising the question of how to replace income if a breadwinner dies does attract some buyers. The main problem is almost all of industry and carrier messages about the need for life insurance are both generic and wimpy. To be more effective, they need to be targeted and emotional.

A typical life insurance ad has soft music where the man or woman is walking through the leaves with the announcer asking “How would you protect your loved ones if you’re no longer around?” Instead, picture this: the man or woman walking through the leaves steps off the curb and gets splattered by a bus. The announcer says, “You just died. That means your family just lost your $50,000 income. Okay Einstein, how are they going to survive now? Life insurance-because you might get hit by a bus today.” A great magazine ad would have a filthy urchin weeping in a cardboard box in some alley with the tagline “Why didn’t Daddy love me and buy life insurance?”

Both of these use affective approaches and affective (playing to emotions) messages work. Targeted framing messages also work. It’s something like “You just bought a home with a $200,000 mortgage and a $1000 monthly payment. For $10 month you can have that mortgage paid off if you die. Where else can you get a 100 to 1 payoff?” The approach targets a very specific need and provides a very specific solution. So the message is not “you might die” it is “you are age 32 and have a 6-year-old child. The studies say it costs $325,000 to raise a 6-year-old child and pay for their college. For $22.87 a month you can get life insurance that provides $325,000.” The foes say targeted approaches are bad because they exclude people, but you’re not trying to attract people, you’re trying to attract a person that will buy the insurance.   

The affective and targeted approaches will get a few more people to buy life insurance today, but they won’t turn the tide. Frankly, the most effective way in the future to increase the societal ownership of life insurance is to do a better job of attaching life insurance to other financial products. When the individual gets a credit card, opens a bank account, gets car insurance, etc. they also buy a life insurance policy. If the life insurance cost is not built into pricing of the main product, then the buyer is automatically charged a premium unless they opt-out. This “nudging” approach has proven effective in employer offered group insurance, with high percentages of employees buying additional coverage if it is presented in an opt-out fashion.  America and Americans need more life insurance; a little nudge may be all it takes. 

In 2002 a maker of ice cream very quietly decreased their standard half gallon container to 1.75 quarts. This was so stealthily done that it took awhile for the public to catch on. When the president of the company was caught on this by the media his response was that this way customers could still get their half gallon of ice cream without a price increase, glossing over the reality that customers weren’t getting a half gallon. In 2008 they quietly cut the size to 1.5 quarts.

In 2006 a toilet paper manufacturer cut the paper size on a roll by 25 percent. Not only did they not publicize this, but the packaging changed to say “now improved with more sheets” without saying how much smaller the new sheets were. And we notice that packages of everything from candy bars to TV dinners are smaller than they were. Regardless of what one thinks about the morality of stealth shrinkage, it is effective marketing because it taps into the way we make decisions and plays to our biases.

Changes in price often cause us to reconsider the value of the product or service and may put us into search mode for better value. By contrast, a smaller size, less selection and charging for ancillary items that were once included in the cost—such as paying to put a suitcase on the plane you’re traveling on—generally don’t trigger search mode. You’ll continue to buy because you’re still getting the basic product.

Another way to play to our biases is to use default mode; doing nothing is easier than taking action. If nudging—as this is sometimes called—gets you to donate organs or save more for retirement, then perhaps it is serving the greater good. However, when it means you must go to three different web addresses to get removed from a dozen spam email lists that you were signed up for because you mistakenly thought the company needed your email address for the warranty, then perhaps that’s a shove and not a nudge.

Numbers can be used to help or hinder understanding. The most recognizable numbers are dollars. As an example, the surrender penalty on a $100,000 annuity might be expressed as $10,000 or 10 percent or one tenth. Using the dollar amount generates the deepest evaluation, using a fraction may not even cause a ripple. 

Framing of the number is helpful too. When the ice cream maker downsized the package he didn’t say you were getting 0.875 half-gallons, he said you were getting 1.75 quarts

Shrinkage also happens in the financial industry, but it’s normally not very stealthy. When interest rates go down or the stock market drops the movement is very transparent—and that’s good—but it doesn’t mean our decisions can’t be affected by biases and that creates a great deal of responsibility.

A large stock market drop has the same effect as a big price increase; it put us into search mode. This can be a positive if it gets the person out of default mode and causes them to take a course of action that we’ve recommended in the past, but it also makes them vulnerable to misleading pitches that hide costs or distort the facts by telling the person they now have more sheets. As I said, it’s a lot of responsibility. 

If you place $130,000 into a fixed annuity with a guaranteed lifetime withdrawal benefit and a 6.5 percent compound roll-up rate for 10 years, with a payout factor of 5 percent at the end of those 10 years, as spelled out in the contract, you can withdraw a guaranteed $12,201 a year for life. Not maybe $12,201, not a projected $12,201, not a Monte Carlo simulated $12,201, but a guaranteed check every year for $12,201 for as long as you live.

If you’ve earmarked certain investments to be left to your beneficiaries to provide a legacy, you can guarantee the amount of that legacy by buying a single premium whole life policy. You will know that the $100,000 will at least provide the beneficiary with, say, $200,000–even if the stock market has a “corrective event”.

Construal Level Theory says that increased psychological distance causes us to see events in the abstract and helps us to plan by giving us a “see the forest” viewpoint. It is helpful in getting across the concepts of retirement planning and why saving for the future is important. The investment approach to retirement and retirement income operates at a relatively abstract level. The income is indirectly generated by using models, heuristics and algorithms. Both asset growth and income longevity is based on the past in some manner predicting the future and on the skill of the advisor. This is all well and good when retirement is still viewed by the consumer in the abstract as something ethereal they will someday reach.

A looming retirement date decreases the psychological distance and causes us to concentrate on the realities of our situation. We are forced into a “see the trees” mindset. Models become less important than practical implementation; reality trumps theory. The question becomes less one of the metaphysics of investment diversification and safe withdrawal rates and more one of concerns over reducing ambiguity and uncertainty.

Investment advisors can talk about their forecasts, their skills and their algorithms, but the future check coming from that annuity lifetime income benefit is certain, unambiguous and is real money that the retiree can take to the bank because the retiree knows exactly how much it will be. The life insurance owner knows the worst-case benefit that will be paid to the beneficiary and thus can provide a certain and assured legacy. Fixed annuities and life insurance are tools to keep handy when you’re dealing with the nuts and bolts of a near retirement.

Traditional economic and financial theories assume we will always make fully rational decisions. This is the basis for Modern Portfolio Theory, the Efficient Market Hypothesis, the Capital Asset Pricing Model, and even Black-Scholes. However, you and I know the truth, which is that people—whether individually or as a group—seldom make fully rational decisions. What this means is that all of the sales approaches that act as if the consumer is Economic Man (Homo Economicus) often fail because we are really Homo Sapiens. The problem is that as regular people we let biases and emotions get in the way. There are 111 triggers that can set up a mix of 28 different biases—any of which can fog our decisions. We can’t do anything about group decisions, but often we can do something to help the person across from us make better financial decisions by removing the fog. However, some fogs are thicker than others.

Question: Did the North American Free Trade Agreement (NAFTA) result in a loss of American jobs, yes or no? Your inclination is probably to say yes, but the reality is that workforce data shows more U.S. jobs were created than lost due to NAFTA. Answering “yes” to the question is a result of availability bias, where we base our decision on the most vivid data, our emotions having been stirred, oftentimes, by the most recently publicized data. It is a difficult bias to counter. Usually the best solution is to acknowledge it and wire around it, such as: “I hear you; by buying this insurance policy you are helping to preserve American jobs.”

We can prevent fogs by using correct framing. An example of correct framing would be asking whether a potential insured would rather his family receive 50 cafe lattes or a check for $100,000 if he died, rather than asking if he can afford a $200 life insurance premium. Another framing example would be to ask a fixed index annuity prospect whether she’d be interested in how to potentially earn the equivalent of 10 years’ certificate of deposit interest in a single year, rather than saying that this annuity is linked to a stock market index but the most you can earn is 4 percent.

A bias to be aware of is representativeness, which means assuming what applies to one thing will apply to another. Here’s what I mean. Survey after survey finds most people want a retirement vehicle with an income that is guaranteed not to go down and will last as long as they live. The same surveys find many of these people say they would not buy an annuity (which is what they just described they wanted). The problem is that they typically are basing this on an assumption that with all annuities the insurance company keeps your money if you die. A way around this bias is to introduce new decision points by saying your financial instrument has those guarantees but that you keep control and can get any remaining cash value at any time (guaranteed lifetime withdrawal benefit). Now, when you say your solution is an annuity, the person will have additional information and will have to reevaluate his opinion on annuities.

It isn’t practical to learn each of the 111 triggers and 28 different biases that affect decision making, but it is important to understand that the prospect across from you is not Homo Economicus and to be aware that there are other forces at work as you present the rational reasons for him to decide in favor of your solution. 

We can never be sure what the future holds in store, but not knowing shouldn’t stop us from looking for potential problems in this uncertain future and creating action plans to follow if the threat occurs. Look at your business, think about possible threats and then create a list of actions you would take for each threat if it happens. The action plan is revised as you learn more and the uncertainty of the effect of your actions is reduced. Here’s an example: Say that you primarily rely on selling fixed annuities paying an average commission of 6 percent. The regulators intervene one future day and determine a “reasonable” annuity commission should be no more than 4 percent and commissions are cut to that level. This action would cut your income by a third. Assuming that is unacceptable, what do you do?

The first step in the action plan is done—we’ve identified the potential threat. Now, what is the solution? Actually, there are several. Perhaps the most obvious step is to increase the number of sales to compensate for the reduced commission rate. How do we do this? We could increase the frequency of the prospecting method currently used—if you’re holding two seminars a month, start holding three. Or we could add additional methods—lead cards, professional referrals and client referrals are effective prospecting tools and all could bring in enough new business to balance the lower payout.

We could also increase our average sales size. Annuity sales that involve monies coming from a defined contribution plan or from an existing annuity tend to be much larger than annuity sales in which the source is the client’s bank account. Revise your prospecting approach to concentrate on 401(k) rollovers and annuity exchanges.

You could also expand your offerings beyond annuities. Single premium life is an annuity-like insurance product in the way it works, but the compensation is better. For clients looking to fill an insurance need, adding life could offset lower annuity commissions.

You could guard against a decline in future income by creating it today. Although you may currently choose to receive commissions in an upfront lump sum, many annuities are available that pay less initial compensation but an ongoing trailing commission. We’ve now identified four action plans to follow if the rates are one day reduced. We have several tracks to run on. In fact, we could put several of these into motion today to see how effective they are and make revisions as needed before the threat hits.

There are many threats out there. Some we can see and thus create ready-to-use action plans. It makes sense to set aside some time to think about possible threats, develop a list of actions to take, and then file these plans to be available if and when the threat hits. Most threats are invisible until they hit, but the action plan process eliminates paralysis by telling us when they do occur to 1) identify the threat, 2) create a solution(s), and 3) revise the solution as needed. The usual response to many threats is to do nothing. By creating an action plan mentality you are always prepared.

There is a network of buses spread throughout the city traveling in a network of streets. If a street is under construction, the bus company will shift the bus route and both the bus and people adapt to the change. However, if people know about the road construction beforehand, they will try to anticipate how this change will affect the bus travel. The consequence of this thinking is that people who normally take the 8:00 a.m. may try to take the 7:00 a.m. bus. This will slow down the 7:00 a.m. bus. Because more people on the bus means more stops, it will get further and further behind schedule, making some people late for work. Meanwhile, because of people catching the earlier bus, there is almost no one on the 8:00 a.m. bus. The bus company notices all of this and eliminates the 8:00 a.m. bus and moves it to a 7:15 a.m. time slot. Since people are now arriving at work 60 minutes earlier each day, employers advance their hours with most now open from 8:00 a.m. to 4 p.m. instead of 9 a.m. to 5 p.m. This provides an extra hour of recreational daylight after work, and many use this extra time to jog or take walks. The physical activity creates a healthier population but increases the need for orthopedic surgeons to operate on worn out knees and hips.

The end result is a new city orthopedic college that one day creates a type of nanobot that fixes not only bad knees and hips but is able to kill all cancer cells, thus adding a decade onto the human lifespan. The increased longevity causes financial woes for annuity carriers offering lifetime income annuities, which eventually requires the U.S. Treasury to bail them out. The derisive term “government annuity” enters the public vocabulary. All of this occurred because of street construction on a city block that has long since ended.

Annuities and insurance are part of an interrelated network—the products do not exist in their own separate world. The interactions of the various external networks with this network make it so difficult at times to notice a threat before it happens. That is because the threats don’t come at us in a straight line but sometimes appear to come out of the blue.

A current example of this is the fiduciary standards rules proposed by the Department of Labor (DOL). Although talk of replacing the current dual standards of suitability and fiduciary with a one-size fiduciary-only standard has been kicked around for a few years, many in the insurance industry viewed this as something that would affect stockbrokers and not insurance agents. However, the DOL rule effectively places all fixed annuity and fixed life insurance agents under a fiduciary best-interest standard and gives the DOL the authority to determine what is “suitable compensation” to the agent. Granted, this rule, if enacted, does not apply to nonqualified sales, but it would still have an extreme effect on the industry.

If we fully appreciate how much our industry is affected by apparently unrelated occurrences, this may cause a stretching out of our threat antenna. An early warning system opens up the possibility of taking proactive measures that minimize or avert risk. The recommendation here is to look at every event—even if apparently unrelated—and ask, “Could this impact me, and what would the effect be on my business?” This task is not simple, but it is necessary.

It has become almost an urban legend that no one has ever lost money in a fixed annuity because an insurance company failed. The reality is, in the last 30 years there have been five times where not everyone was paid 100 percent of their account value. However, every annuity owner has been covered up to the limits of their state guaranty association.¹

In 1941 New York created the first life insurance and annuity guaranty plan, but no one followed for 30 years. Why was there opposition to guaranty plans? Some felt a guaranty plan rewarded incompetent management, meaning well-run carriers would pay for the mistakes of the bad ones. By 1983 only 35 states had life/health guaranty associations that provided a funding mechanism to cover the insureds of insolvent life and annuity carriers. However, in 1983 Baldwin-United failed, putting 300,000 policyholders at risk, and that prompted the remaining states to reconsider their opposition. (It should be noted that when it was all over not only did every Baldwin-United annuity owner get all of their principal back, but the annuity owners earned yields of 4 to 7 percent.) A few years later, in 1990, when it became apparent that Executive Life was going to crash, California finally created their own guaranty fund. The last state to create a guaranty association was Louisiana in 1992.

Did the creation of guaranty associations result in more mismanaged carriers? A study² released this year says maybe, finding a slightly higher fixed annuity growth rate in firms with lower financial ratings in states that had guaranty funds than those that did not in the period from 1985 to 1992. I am inclined to say that the existence of guaranty funds was not responsible for this growth, because agents are proscribed in every state from using the existence of a state fund in marketing fixed annuities. Additionally, my personal experience is that consumers tend to discount the benefit of a guaranteed fund (it also should be noted that, unlike banks with FDIC insurance, the states do not have an actual pot of money to draw from if a carrier fails, but instead assesses remaining firms to pay any guaranteed covered losses).

Events over the last 20 years have shown that guaranty funds are less likely to be needed, and this is largely due to changes in insurance carrier supervision. Risk-based capital (RBC) regulations were implemented in 1994. The reason for them was to get a better handle on any potential problems and to let the state step in more quickly if there appeared to be a problem. The formula looks at interest rate risk, business concentration risk, credit risk, and risks particular to the products being offered, such as underwriting risk on life or health policies. Although the process is static, the formula is not, and it has evolved to reflect changing times. For example, in response to the real estate bubble, NAIC tweaked their model to more accurately assess the quality of residential mortgage-backed securities in an insurer’s portfolio. The result? Although 21 annuity carriers went into state reorganization between 1985 and 1994, only 10 annuity carriers have done so since.

The bottom line is that when European insurers were rocked by the millennium bear market and then jostled again by the 2008 financial crisis, the U.S. regulated life/health insurers were able to easily weather the storm. All in all, the annuity industry is well-positioned to withstand the financial challenges to solvency that may occur in future years with state guaranty associations backing them up.

Footnotes:

 1. Marrion, J. 2011. Fixed annuity carrier safety. Advantage Compendium. 3; 2.

 2. Grace, M. et al. 2015. Market Discipline and Guaranty Funds in Life Insurance. Social Science Research Network, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2597052.

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.

Beacon Research offers a suite of products to access industry leading annuity data mined from industry filings, researched from company websites, collected from annuity issuers and rigorously quality-checked by experienced data analysts and issuing companies. Beacon Research provides the most comprehensive and accurate fixed and variable contract and sales data in the industry. They can be contacted at 800-720-3504 or on the web at www.beaconresearch.net.

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.