Now, in a turnaround, some major issuers of variable annuities (VAs) are pulling back, getting out of the business entirely, or in some cases even offering to buy policies back from clients who bought products with generous lifetime income riders.
"It's all about low interest rates and insurance companies trying to de-risk after some of the issuers got over-aggressive during a variable annuity arms race," Steven Saltzman, a research analyst with Kehrer Saltzman Associates, says.
Overall, annuity sales have been trending downward for more than a year, with monthly inflows falling to approximately $8 billion in June 2012 from just over $10 billion in June 2011, according to the Depository Trust & Clearing Corporation (DTCC). The primary channel for marketing annuities-accounting for 28% of annuity sales-remains independent agents, followed by wirehouses (17%), regional broker dealers (15%), banks (13%), and insurers (9%).
Independent broker-dealers have been gradually increasing their share of the VA market since 2006, when they accounted for 26% of the sales of that product line. By 2010, they had a 30% share, and have continued to gain since then, according to LIMRA data. Banks led in the fixed annuity category, with 40% of the market in 2011, but that is down from a high of 48% reached in 2008.
According to data from LIMRA, total VA sales through the first half of 2012 were $75.4 billion, down 6% from the $80.1 billion of VAs sold over the same period in 2011. Analysts say that the sales reported in the first six months of 2012 going from $38.6 billion to $40.6 billion (especially during the second quarter, which actually showed a slight increase over the first quarter), were boosted by clients trying to buy products with generous lifetime income riders before they were taken off the market.
Meanwhile, as the VA market has softened, indexed annuities, a sub-category of fixed annuities, have taken off. Overall fixed annuity sales for the first half of 2012 totaled $111.8 billion, down 8% from the year ago period when they hit $121.4 billion. However, while almost all categories of fixed annuities showed a similar drop in sales during that period, indexed annuities jumped 10%. They went from $15.2 billion in the first half of 2011 to $16.7 billion in the first half of 2012. Independent agents continue to be the primary sellers of indexed annuities, accounting for about 85% of the market in 2010 according to LIMRA, though that is down slightly from a high of 89% in 2006 and 88% in 2008.
Variable annuities are insurance products that offer the investor the option of choosing to link to some category of asset, such as the S&P Index, or bond index or some combination of assets. They then offer some minimum rate of return and a lifetime benefit payout rider, which could be higher depending on the performance of the underlying assets. Fixed annuities, unlike VAs, guarantee the full principal invested, and pay interest like a certificate of deposit, only often at higher rates, which can be paid immediately or deferred. An indexed fixed annuity tries to enhance that interest rate by linking to some equity index-say the S&P 500, which is used by 92% of indexed products. Indexed annuities typically pay a higher rate (less fees and subject to a cap) if that index does well, but guarantee some minimum rate even if the equity index were to tank.
Analysts say that while VA sales are slowing, and index annuity sales are rising, there is not necessarily a direct relationship between the two. As John McCarthy, an annuity analyst with Morningstar, explains, the two kinds of annuities are fundamentally different. "A variable annuity," he says, "is essentially a mutual fund. If the market does well, you get paid more. But if the market falls, you can lose your principal." The difference, he says, is that the issuer guarantees the investor in a variable annuity some base rate of return-typically 5% or higher-whereas a mutual fund guarantees nothing. Meanwhile, McCarthy says, an indexed annuity, while it may be linked to some index, is really more a higher yielding alternative to a CD, typically these days paying around 3% to 3.5% interest.
"A variable annuity is good for those people right close to retirement," McCarthy says. "That's the sweet spot for these products. They can be invested in equities, but the investors don't have to worry about a market collapse right when they are going to stop working." For example, he notes, if someone had invested their retirement assets in a variable annuity in the early fall of 2007, the equities market would have promptly dropped by 37%, but the VA holder would have seen his or her income from the product stay at 7% for the year."