The recent severe weather in the Northeast notwithstanding, sometimes a “storm” can be a positive force. Take, for instance, the forces that have converged to propel fixed indexed annuities (FIAs) to the top of the annuity world. While sales of variable annuities and fixed-rate annuities have slumped in recent quarters, FIAs have increased in sales volume.
The broad fixed annuity category‑which includes fixed indexed annuities‑fell 12.8 percent between the third quarter of this year and Q3 2011, going from $19 billion to $16.6 billion, reports Beacon Research. Meanwhile, the FIA subset gained‑albeit slightly‑during over that same period, rising from $8.69 billion to $8.74 billion.
Variable annuities saw a year-over-year drop in sales of 7.2 percent, declining from $39.1 billion in Q3 2011 to $36.3 billion the third quarter of this year, according to Morningstar.
So what is behind this perfect storm for FIAs? Why are they bucking the trend in a harsh economic and investment environment?
In a recent interview, Eric Thomes, right, senior vice president of sales, Allianz Life Insurance Company of North America, pointed to two factors.
One, not surprisingly, is this persistent low interest rate environment that renders other safe-money investment options, such as CDs and the traditional fixed-rate annuity, less attractive. By contrast, a fixed indexed annuity, with its principal protection feature and ability to participate to some degree in market gains, appeals to investors now.
“You still have the downside protection, which is ultimately why the consumer is buying it,” Thomes said. “They don’t want to lose any principal with the contract.”
The product is also making inroads into a new distribution channel. Once spurned by registered investment advisors (RIAs), securities producers and fee-based advisors, fixed indexed annuities are now finding a place on their product menu. “We are seeing growth in our sales of FIAs from registered reps and securities professionals,” Thomes noted. Allianz is a leading seller of fixed annuities.
Traditionally, they favored variable annuities, and still do, Thomes said. But as FIAs display features commonly associated with variable annuities‑shorter durations, living benefits‑RIAs and other advisors are warming to the product as another option in the “safe money bucket,” Thomes said. “Maybe they used bonds, maybe they were using fixed annuities, but for that safe money bucket, they are finding a fixed indexed annuity is a place where potentially they can reap their clients some higher returns but still have principal protection because of the floor or downside protection with any fixed annuity.”
Yet, a third-quarter report from AnnuitySpecs.com, which compiles sales statistics on fixed annuities, found that guaranteed lifetime withdrawal benefit (GLWB) elections had dropped in the third quarter. The report points to increased rider charges and reductions in roll-ups as two reasons for the decline; it also indicates that FIA providers are seeking ways to manage those GLWB options in a depressed rate environment.
In the same vein, some variable annuity providers are either offering buyouts to escape those clauses or constructing their policies without GLWBs.
Thomes conceded it is tough when interest rates lull in the low range, but maintains FIAs have leverage to manage in-force contracts.
The problem for VA carriers stems from contracts written before the market crashed in 2008. When policyholders saw their income value outpace their account value, they turned on the income benefit riders, leaving the carriers without many alternatives but to honor the guarantees in the contracts. Variable annuity carriers now have more options to mitigate those risks based on current economic conditions, Thomes said. Back then, they didn’t.
“On a fixed indexed annuity, on the income side, yes, those are guarantees and you have to be conscious of pricing those guarantees,” Thomes said. “But on the accumulation side, you’ve got levers‑you’ve got caps, you’ve got fees, you’ve got things you can change and manage on an annual basis on in-force business. Whereas in the past, a lot of the variable annuity business, once you bought it, nothing changed. It was contractually guaranteed and the company couldn’t do much about it.”
Recently, Allianz launched a new fixed indexed annuity, Allianz 222, which was designed after the company did research to ascertain what features would resonate with consumers and advisors, Thomes related. Its latest FIA includes an option to increase the income stream if the policyholder is confined to a nursing home or other facility for 90 out of 120 consecutive days.
Until interest rates take a turn upward, Thomes does not foresee much innovation in the annuity industry. “Companies are just trying to get their products profitable in this space. As interest rates do start to come up, you will see more product innovation, and you will see more focus on the income benefits.”