Since the global financial crisis, many of the largest insurers in the United States have exited the annuity market entirely, or limited production due to capital constraints and the ongoing impact of the low interest rate environment. Throughout 2012 and the first part of 2013, advisors have continued to cope with these changes in the annuity landscape. While some companies have added variations of annuities to their platforms in an effort to fill the void left by the exodus of the traditional annuity manufacturers, the overwhelming trend has been fewer choices and uncertainty for advisors as they try to meet their clients’ growing demand for retirement solutions. As demographics and memories of market volatility continue to drive baby boomers’ needs for stable accumulation and guaranteed income provided by this product segment, the question remains, “How will the product provider gap be filled?”
Rise of the new entrant
Over the last 12 months, we have observed a trend worth watching closely. The acquisition by “new entrants” of unencumbered product development functions, new business operations and distribution relationships from existing insurers is creating new launching pads for the next generation of annuity manufacturers. These new entrants have reacted to and leveraged lessons learned by prior players and are positioning themselves to quickly capitalize on traditional providers’ changes in strategic direction. New entrant management teams and their partners recognize the value of distribution relationships, operational scale and intellectual capital that accompanies these acquisitions. These actions today allow them to quickly build product, operational scale and provide capacity to market.
Some new entrants are piloting their new capabilities and products in a few states, giving them an opportunity to work with existing advisor networks and marketing organizations to get everything right before their products are introduced nationally. In the majority of these cases, platform acceptance is not an issue; advisors are already familiar with the benefits of annuities and thus require less training. The new offering is an additional option for advisors to offer their clients.
Old providers – new capacity
The increased pace of private equity-backed acquisitions in the annuity industry is a trend that we also believe will have a beneficial impact on new product availability, albeit on a longer timescale. As existing back books of business move off the balance sheets of traditional annuity providers and create some “headroom” in capital availability for annuities, the stage will be set for new designs from traditional providers. Burned by recent experiences, however, the return will be gradual and slow in nature, driven by “sustainable manufacturing approaches” particularly in the variable annuity (VA) marketplace. Simpler or non-traditional offers supported by those with big-name recognition are the dominant approaches we see emerging under this model. Those with access and acceptability on bank platforms have the advantage of being able to build on their existing relationships and attractively position annuities as alternative investments to clients in the current low interest rate environment.
Focus on new areas
At the most basic end of the scale, selected new entrants are focusing on offering very simple, low-cost annuities, concentrating on investment flexibility and tax advantages to capture 1035 exchanges or as alternatives to IRA rollover vehicles.