The big, publicly traded U.S. life and annuity issuers did well in the first quarter, in spite of everything, but analysts at Morgan Stanley are wondering about the registered index-linked annuity boom.
Today, Bob Jian Huang and other Morgan Stanley analysts wrote, the issuers are turning toward sales of RILA contracts and away from sales of traditional variable annuity contracts.
"While RILA is serving as a replacement, we believe the longer-term strategy is to pivot towards asset/wealth management," the analysts wrote in a commentary that came out Monday and was posted behind a paywall.
What it means: If the Morgan Stanley analysts are correct, some annuity issuers could eventually tilt away from offering annuities.
That could make finding the right annuities for clients more difficult and increase the value of any contract guarantees or buffers that are still in force.
Annuity basics: A variable annuity contract ties the crediting rate, or interest rate, to the performance of one or more investment funds that resemble mutual funds.
A RILA contract can tie the crediting rate to the performance of one or more investment indexes. Insurers can often use off-the-shelf derivatives contracts to power the crediting rate machinery instead of struggling to manage assets.
The market backdrop: The first quarter ended March 31.
Investment market volatility started to increase in the first quarter, as investors worried about the possibility that the administration of President Donald Trump could impose large tariffs, or import taxes.
Volatility soared after April 2, when Trump began to unveil and implement import tax changes.
Between mid-April and mid-May, the the Trump administration softened some of the import tax changes. Volatility eased.
Annuity issuers' performance: The Morgan Stanley analysts started the year hearing worries about "spread compression," or the possibility that annuity issuers would generate high enough returns on their own investments to justify the returns they were offering to holders of life insurance policies and annuity contracts.
"These pressures appear to be less onerous than previously thought," the analysts wrote in a new quarterly review that came out Monday. "Meanwhile, the environment for writing new business remained relatively supportive."
Overall, "core results were above expectations," the analysts wrote.
The post-April 2 volatility appeared to be a major concern early in April, but, since then, "the operating environment has gotten materially better for life insurers," the analysts wrote.
If investment markets continue to firm up, the stock prices of some of the more market-sensitive annuity issuers could jump, the analysts predicted.
Variable annuities vs. RILAs: Some annuity issuers have said that they want traditional variable annuity assets to flow out and RILA assets to flow in, because they believe blocks of RILA business are easier to manage.
The Morgan Stanley analysts would like to see the issuers keep more variable annuity assets.
"Variable annuity outflows showed weakness," the analysts wrote. "Variable annuity flows have been inconsistent for sometime; we believe this pressure is likely to continue."
Variable annuity asset outflows could go in either direction in the second quarter, the analysts said.
"That said, given the equity market recovery from the early April lows thus far, 2Q25 could ultimately turn out to be another quarter in which results hold up well," the analysts wrote.
Morgan Stanley's views: The Morgan Stanley analysts are simply trying to give investors interesting ideas about how to think about life and annuity issuers and may not be right about the issuers' strategy. But the commentary could spark conversations and give issuers that are enthusiastic about staying in the annuity market a chance to talk about that.
Credit: Tada Images/Adobe Stock
© Touchpoint Markets, 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.