The end of surrender-charge periods for individual fixed annuities could free more than $70 billion in cash to flow just about anywhere.
The new wave of maturities could hurt annuity issuers that are losing sales momentum and help the annuity issuers that are now hot, according to Bob Jiang Huang and other analysts at Morgan Stanley.
Some of the newly liberated cash could flow out of annuities altogether. But the analysts predict, in a new commentary posted behind a paywall, that much of the cash will become assets under management inside registered index-linked annuities.
"Companies with superior distribution should be better positioned to recapture more of this AUM flow," the analysts write.
What it means: A significant portion of your clients' assets might be stored in fixed-rate annuities that have surrender charges ending this year, and marketers might buzz around those assets like bees around a flower full of nectar.
The backdrop: U.S. life insurers have $2.7 trillion in reserves backing individual annuities, according to the Federal Reserve board.
The average initial premium for fixed-rate annuities jumped to more than $120,000 in 2020, from just $98,000 in 2019, and a high percentage of the premiums went into multi-year guaranteed annuities set up in such a way that contract holders would have to pay an extra charge if they failed to keep their money in the contracts for at least five years.
LIMRA analysts have estimated that the ending of surrender-charge periods will free up $70 billion in MYGA assets.
Typical fixed-rate annuity crediting rates were about 2% in 2020 and 5% today.
The owners will have a strong incentive to move assets from contracts that may pay a rate of just 2% to instruments that pay rates of 5% or more.
In 2024, about 4% of a typical annuity issuer's sales came from the issuer's own customers replacing old annuities with new annuities. Another 56% of the premium cash came from outside the annuity sector, and 40% came from annuities from other issuers, according to a Morgan Stanley analysis of LIMRA data.
Bryan Hodgens, head of LIMRA research, has predicted that falling rates could hold down fixed-rate annuity sales this year. But "LIMRA believes many conservative investors will reinvest their assets in these products," Hodgens said. His team has suggested that sales of fixed annuities could be 25% lower this year than in 2024 but still about twice as high as in 2022.
The Morgan Stanley team's thinking: Huang and the other analysts agree with Hodgens that much of the cash now in fixed annuities will stay in annuities.
Interest rates have stayed higher for longer than most had expected, and "favorable interest rates suggest fixed products," the analysts write.
If rates do start to come down, that could be good for sales of RILA contracts and fixed indexed annuities, the analysts say.
A fixed indexed annuity protects the contract holder against loss of value related to changes in interest rates, bond prices or stock prices. It has a crediting rate, or interest rate, that can be tied to the performance of one or more stock indexes or other investment market indexes.
A RILA contract is similar to a fixed indexed annuity but is registered with the U.S. Securities and Exchange Commission as a security. Because the RILA contract is a security, it can expose the holder to the possibility of investment-index-related loss of value. The issuer can charge the purchaser for protection against loss of value.
Although many of the clients who now hold MYGA contracts or other fixed-rate contracts might prefer to move cash into new fixed annuities, "fixed annuities are held on the general account, and they tend to be more capital-intensive than other annuities," the Morgan Stanely analysts write.
Many insurers are now avoiding issuing capital-intensive products, and they have either stopped selling MYGAs and fixed indexed annuities or found reinsurers to take responsibility for most of the fixed annuity liabilities, the analysts say.
Because of many issuers' shift away from selling capital-intensive products, the analysts say, the new fixed annuity maturity wall could do more to increase RILA sales than sales of fixed annuities.
The analysts cite Corebridge Financial as an example of an issuer that might be in a good position to pull maturity wall cash into its RILA contracts.
Credit: Diego M. Radzinschi/ALM
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.