First-quarter stats are in and the numbers indicate that overall annuity sales took a step backward from the fourth quarter of 2011. Though there are some bright spotsincome and indexed annuity sales are performing somewhat betterthe industry overall has been dinged by broader market forces, namely low interest rates, say the experts.
Jeremy Alexander, right, resident of Evanston, Ill.-based Beacon Research, which tracks annuity sales, said in an interview that providers of all the main product typesvariable, indexed and fixedare experiencing a drop in profits. Even in the variable annuity space, carriers are feeling the pinch of low interest rates, which hampers their ability to invest in profitable vehicles. Unlike the normal market forces of supply and demand, the carriers pretty much control the amount of product put up for sale. Alexander explained. “If annuity issuers don’t want to sell annuities, they don’t,” he said. “They either lower the interest rate, provide disincentives for selling it or get out the market entirely. So it’s not that there isn’t a demand for these products. I think the carriers don’t want to issue them at these rates in this environment. That is true whether it’s a variable, fixed or indexed annuity. There has been a pullback in the industry to not have as much product on the street and that does affect sales.”
Bruce Ferris, left, head of sales and distribution at Prudential Annuities in Shelton, Conn., said the slump in annuity sales mirrors that of other investment options, like domestic equity funds that also saw outflows. “What you are seeing in variable annuities and the broader market is the consumer or investor is still consumed by fear,” he said. “Fear of volatility and fear of the unknown or worried about a recurrence of 2008 or a double dip.”
The Prudential executive said that instead of looking at quarter-over-quarter numbers, he takes a longer-term view. From that perspective, VA sales did gain: Morningstar reported that sales of new VAs for all of 2011 rose 12.3 percent from 2010.
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Even with the recent quarterly slip in sales, VA net assets hit a record high of $1.6 trillion in the first quarter, according to Morningstar. Ferris took that as a good sign.
“They are almost back to the 2007 level, which was the high-water market and quite frankly in 2007, that was the height of the arms race and we were all competing for each other’s business versus bringing new dollars into the marketplace,” he said. “Net sales are a good indication of new assets going into variable annuities and that people are holding onto these investments because they view them as valuable or in the money. And it’s good for the shareholders of public companies because we earn our returns off of assets under management.”
Some bright spots
Income and indexed annuities did post sales increases year-over-year, Beacon Research reported.
That’s because immediate and other types of income annuities fulfill a need for a policyholder to get steady income in retirement. It’s a buy based on necessity rather than investing to obtain a particular rate, Alexander said.
“Most people can’t accumulate enough money to have a safe retirement by pulling out systematic withdrawals from their accounts,” he said. “So, when you look at all the options, you find that the best way to produce income is to have a check a month for life from an insurance company because it’s giving you back your own money plus interest.”