Annuity Sales Ravaged by DOL Uncertainty; VA Troubles Persist
May 19, 2017 by Greg Shulas
Limra forecasts that U.S. annuity sales will fall below $200 billion in 2017 for the first time in 16 years, as all major product lines feel the impact from DOL Fiduciary Rule uncertainty. That’s according to the research firm’s first quarter performance review.
Variable annuity (VA) sales will decrease by 10% to 15% by year-end, making it the first time since 1998 that sales fell below $100 billion, Limra projects. The forecast came after variable annuities sales dropped 8% in the first quarter compared to the previous period, as total VA sales stood at $24.4 billion for the three months trailing March 31.
As a result, VAs underperformed fixed annuities for the fifth consecutive quarter, as fixed annuity sales stood at $27.6 billion (a 15% drop from Q4 2016). Uncertainty about the DOL Fiduciary Rule’s future apparently trumped the economic optimism the U.S. public largely witnessed in the year’s first three months, says Todd Giesing, assistant research director of the Limra Secure Retirement Institute.
“Despite an improvement in the equities market and interest rate environment, uncertainty around the DOL rule overwhelmed any impact it may have had on annuity sales,” Giesing says. And while annuity sales slightly increased percentage wise to $52 billion on a quarter-to-quarter basis (albeit, a 12% drop from Q1 2016 performance), the industry’s overall report card was more negative due to Limra’s downward sales projections.
The fixed annuity sector’s setbacks were seen among all product lines. Index annuity sales fell by 13%, ending the quarter at $13.6 billion, as seven of the 10 largest product manufacturers reported sales declines. And in a rare occurrence, Limra said, more sales were made with index annuities without guaranteed living benefits than products with them.
“While we typically see a seasonal decline in the first quarter, we suspect there are some companies re-evaluating their product mix in anticipation of the DOL rule,” Giesing states in the release. “Unless there is a change in the DOL fiduciary rule rollout, we are anticipating indexed sales in 2017 to decline for the first time in a decade.”
The future will likely get more challenging for index annuity providers, as their product sales should drop by 5% to 10% in 2017 and then 15% to 20% in 2018 when the DOL’s best interest contract exemption (BICE) will be in effect. (Under the BICE provision, advisors must commit in writing that any product they recommend for a designated retirement account is in their client’s best interest, and that any compensation received for selling products is not influencing their investment advice. The Trump administration’s new DOL commission is against the rule, although whether it can be reversed at this point remains unclear.)
Meanwhile, fixed-rate deferred annuity sales dropped by 16% to $10 billion in the first quarter. However, Limra believes the product line should experience 5% growth rates for the full year, and even 15% to 20% growth in 2018. The Windsor, Conn.-based research firm described the first quarter decrease as “an atypical quarter in which a large block of business came to term with a sizable amount reinvested in the new fixed annuity products. “
Income annuities were also under pressure. Limra noted that single premium immediate annuity sales dropped 20%, to $2 billion in the first quarter, while deferred income annuity sales decreased by 26% to $545 million at the quarter’s end. The research firm noted that the rough performance came “despite steady interest rates, as flexibility features in deferred annuities are trumping the higher payouts typically seen in income annuities.”
Limra predicts a 5% to 10% drop in income annuity sales in 2017, but a 10% to 15% rebound the following year.
Some of the challenges annuity providers face, Giesing notes, may run deeper than just the Fiduciary Rule, particularly with VAs.
“While we believe the DOL is playing a significant role in the declining VA sales, this downward sales trend began before the DOL announced their rule,” said Giesing. “Sales with a guaranteed living benefit (GLB) continued to decline at a much faster rate than products without. In fact, where we are seeing growth is in the structured VA market. In the first quarter, structured settlements grew 60% compared to first quarter 2016. This segment represents about 5% to 10% of the total VA market.”
But Ignites, a sister publication to Life Annuity Specialist, reports that some of the larger VA providers are bucking the downward sales trend in the first quarter. For example, Jackson National led the market with $4.5 billion in sales, an increase of 4.5%, and TIAA witnessed a 3.9% hike, resulting in $3.2 billion in sales. Further, AXA brought in $2.7 billion, a 6.7% increase.
