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Evolution & Revolution: Report details year of disruption, adaptation for annuity market

Insurance Forums Staff

Fixed Indexed Annuities and Investment-Oriented Variable Annuities are growing rapidly this year, while market conditions should boost “Buffer” Annuities, Fee-Based Annuities and Variable Annuities to strong sales in 2018, according to a new “state of the industry” report released Dec. 7.

The Insured Retirement Institute’s (IRI) sixth annual State of the Insured Retirement Industry report covers trends and events over the past year and their implications for the future. This year’s report includes reviews and analysis of product development, market environment, annuity sales and distribution, and legal and regulatory developments.

“The past year has been a challenging one for the insured retirement industry,” IRI President and CEO Cathy Weatherford said. “Annuity sales are down from their peaks, and persistently low interest rates and regulatory changes have driven manufacturers and distributors to adapt to new paradigms by developing new products and processes. We are, however, optimistic about the future of the retirement income industry, as it remains the sole industry positioned to meet Americans’ growing need for access to retirement solutions and lifetime income products. IRI also remains committed to advocating for common sense policies, like those contained in our Blueprint for Retirement Security, to help Americans achieve their retirement goals.”

Among the report’s key findings, IRI notes product development and distribution are evolving in the wake of regulatory disruption, with product development focusing on fee-based products, and emerging product structures such as “buffer” annuities.

The report also notes assets under management in annuities are at or near historic highs due to positive stock market returns, and within the various distribution channels shifts are occurring in product mixes as businesses adapt to the more onerous regulatory constraints resulting from the DOL fiduciary rule.

As the bull market heads into its ninth year, annuity providers are continuing to report healthy earnings and strong balance sheets with between $800 billion and $1 trillion in assets covered by some form of lifetime income benefit. But liabilities could increase significantly in the event of a severe market correction. If this were to occur, then having effective hedging programs in place would be crucial.

IRI further noted in the report interest rates reaching or exceeding 3% could lead to enhancements in income benefits, higher caps on earnings in indexed and buffered products, and potentially a tremendous boost in sales driven by demographical demand. However, the Department of Labor’s final fiduciary rule continues to pose a significant risk of further market disruption, so long as its future remains unsettled.

Trends in 2017

  • Fixed Indexed Annuities (FIA) and Investment-Oriented Variable Annuities (IOVA) are growing rapidly. FIAs continue to post strong sales as both a fixed income substitute – meaning a bond-like return without interest rate risk – and on the attractiveness of optional guaranteed lifetime income benefits.
  • Industry Consolidation, Streamlining, and Disruption: Exiting distribution, paring back product offerings or distributor relationships, and shifting product focus as companies digested the potential impact of the DOL fiduciary rule and adjusted their business models accordingly.
  • Growing Awareness of Retirement Issues: The 2017 report from IRI and Jackson, “The Language of Retirement 2017,” found that 8 in 10 Americans do not believe that Social Security alone can provide them with sufficient retirement income. The same report found that only 1 in 5 expect a pension, implying there will be millions of people tapping their savings for income.

Looking ahead to 2018

  • Buffer annuities will continue to grow in popularity: Blackrock research finds that 39% of retirement savers would move further away from their cash holdings if their capital were protected. As cash continues to be a non-performing asset, interest in products that offer upside potential and downside protection will increase.
  • Fee-based annuities will begin to gain traction: re-tooling processes to incorporate fee-based annuities into portfolio construction takes time, and training of advisors. As transaction processing improves and training takes hold, sales will grow.
  • Retirement risk management features will help drive VA sales: amid growing awareness of the need to protect assets from the devastating costs of a long-term care event, and the availability of underwritten long-term care insurance recedes, hybrid solutions offered through variable annuities will provide further value to retirees.
  • DOL Fiduciary Rule: potentially vacated by the 5th Circuit, or modified into a workable best interest standard during the 18-month implementation delay.
  • IRI Retirement Security Blueprint: IRI will continue to encourage Congress and/or the administration to enact and adopt common sense measures to increase access to lifetime income in retirement plans, help Americans to better prepare for a secure retirement, promote consumer choice and education, and reduce regulatory burdens for lifetime income options.

IRI says advocacy contributes to DOL Rule delay

The State of the Industry also includes a review of IRI’s public policy agenda and focuses on the role it has played in influencing a variety of critical industry issues which have come before Congress and the Executive Branch. Some highlights of the work accomplished in moving the agenda forward include having conducted nearly 200 meetings with Members of Congress, producing research, and undertaking educational and advocacy campaigns, all of which contributed to helping achieve an 18-month implementation delay of the DOL’s fiduciary rule and the preservation of tax-deferred treatment of retirement savings and diversity of workplace retirement plans in tax reform.

The Department of the Treasury in a report on Asset Management and Insurance published in October 2017 embraced as recommendations to the President several of IRI’s public policy proposals. These included calling for the DOL to clarify a rule to allow employers to select products provided by insurers that meet certain existing regulatory requirements, such as minimum capital and reserving standards and recommending the SEC adopt a variable annuity summary prospectus rule.

Additionally, this year’s report looks at emerging trends among financial advisors. It explores how they are adapting to changes in products and processes, how they work with their clients, and how they view their roles and their value in helping clients save for retirement, create secure income, and navigate the many pitfalls that can derail the best of plans.

For a PDF of the full report, click here.


DOL Rule uncertainty contributes to 15% drop in 3Q annuity sales

Industry-wide annuity sales in the third quarter of 2017 totaled $43.7 billion, a 13.3% drop from sales of $50.4 billion during the second quarter of 2017, and a 14.8% decline from sales of $51.3 billion in the third quarter of 2016.

IRI announced final third-quarter sales results for the U.S. annuity industry on Dec. 8, based on data reported by Beacon Research and Morningstar, Inc.

According to Beacon Research, fixed annuity sales during the third quarter of were $22.7 billion, a 15% decline from second quarter sales of $26.7 billion and a 12.5% decline from sales of $26.0 billion during the third quarter of 2016. Variable annuity total sales were $20.9 billion in the third quarter of 2017, according to Morningstar. This was an 11.6% decrease over sales of $23.7 billion in the prior quarter, and a 17.5% decline from sales of $25.4 billion in the third quarter of 2016.

“An uncertain regulatory environment continued to disrupt annuity sales in the third quarter,” said IRI President and CEO Cathy Weatherford. “The ambiguity introduced into the marketplace by the partial implementation of the DOL fiduciary rule has interrupted consumers’ access to financial products that are critical to a financially secure retirement. IRI is optimistic that recent drops in annuity purchases are a function of short-term regulatory disruption, and the needs of the thousands of Americans retiring each day will drive a strong recovery as manufacturers and distributors adapt to regulatory changes.”

According to Beacon Research, while sales of all fixed annuities fell in the third quarter, fixed indexed sales saw the lowest drop in sales, falling 9.2% to $13.6 billion from second quarter sales of $14.9 billion and comprising 59.6% of total fixed annuity sales. For the entire fixed annuity market, there were approximately $12.7 billion in qualified sales and $10.0 billion in non-qualified sales during the third quarter of 2017.

“While fixed annuity sales fell in the third quarter, they are still near historic highs as distribution of fixed and fixed indexed annuities continue to broaden,” said Beacon Research CEO Jeremy Alexander. “As manufacturers and distributors adapt to regulatory headwinds and ambiguity in the regulatory environment is resolved, we expect to see a strong recovery in sales volume.”

According to Morningstar, variable annuity net assets fell 1.4% to $1.96 trillion during the third quarter of 2017, versus second quarter net assets of $1.98 trillion. On a year-over-year basis, assets were up 1.9%, from $1.92 trillion at the end of the third quarter of 2016, as positive market performance outweighed the impact of lower sales and negative net flows. Net flow in variable annuities were -$14.8 billion in the third quarter. Within the variable annuity market, there were $13.2 billion in qualified sales and $7.8 billion in non-qualified sales during the third quarter of 2017. Qualified sales fell 14% from second quarter sales of $15.3 billion, while sales of non-qualified variable annuities fell 7.1% from second quarter sales of $8.4 billion.

“The variable annuity business continues to face challenges as distributors adjust to changes made in the wake of the DOL fiduciary rule, and advisors adapt to new business processes,” said John McCarthy, Senior Product Manager at Morningstar. “However, we now see almost 40% of variable annuity assets in allocation funds, with the bulk of those assets under lifetime withdrawals benefits, versus 33% in the second quarter. This shift toward the asset allocation asset class provides diversification to VA owners in the event of a market correction, and a secure source of income.



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