Q3 Annuity Sales Trends Defy Explanation

Third quarter overall individual annuity sales dropped 13 percent to $46.8 billion from a year ago, but there was no shortage of theories to explain why. Here are a few possible explanations that are floating around.

• Money stayed on the sidelines.
• Money moved into more flexible managed accounts.
• Money rolled over from certificates of deposit and stayed there thanks to narrowing spreads.
• The partial implementation of the fiduciary rule roiled distributors.
• Some money departed into the mutual funds.
• Individual retirement account contracts for variable annuities suffered compared to non-qualified money.

Still, none of these explanations seemed to offer adequate reasons for why billions of dollars drained out of the annuity pond.

Third quarter variable annuity sales fell 16 percent to $21.8 billion, while fixed annuity sales shrunk 10 percent to $25 billion compared to the year-ago period, LIMRA reported.

“There’s all these different theories out there of where the money is but we don’t have a specific answer,” said Todd Giesing, director, Annuity Research, for LIMRA.

One recurring explanation among annuity industry experts was the “hangover” from the Department of Labor’s (DOL) fiduciary rule.

The third quarter was the first full quarter following the June 9 partial implementation of the rule, which raises advisory standards into retirement accounts.

Distributors, especially those selling fixed indexed annuities and variable annuities, spent months struggling with “reasonable compensation” as actuaries and pricing managers worked overtime to calibrate products.

“The reality is, with the DOL, everybody had to put on the brakes and put resources into prepping for DOL,” said Eric Denham, executive vice president, Product & Business Development with Annexus, a developer of fixed indexed annuities.

Two other big agencies are starting to come around as well: the Securities and Exchange Commission with its harmonization framework and the National Association of Insurance Commissioners with its push for regulatory consistency.

The Distributors

Independent broker/dealers (IBDs) and independent marketing organizations (IMOs) spent the entire first half of the year preparing for the fiduciary rule changes. The changes originally were  slated for April, but then were delayed until June 9.

Distributors, in consultation with insurers, dropped long-time products and added others. Insurers also simplified or pruned features from popular product lines and rejiggered agent compensation schedules, experts said.

That took some getting used to.

In the end it was the agents and advisors who emerged as the linchpin on which hung annuity sales in this latest quarter, as the distributors tiptoed into a new best interest world of heightened risk and newfangled liability.

“It’s important to focus on distributors,” said Scott Hawkins, director, insurance research for Conning & Co.

Remember that the agents, advisors and distributor firms are the ones falling under new regulatory perspectives, Hawkins said. If they don’t get it right “that can cause the distributors headaches later on.”

The changes caused agents and advisors to approach late June and July with caution, only to find out in early August that key parts of the fiduciary rule would be delayed for 18 months, until July 1, 2019. This delay caused still further trepidation.

At the beginning of the year, many firms were preparing for the changes to take effect in the second quarter, only to see a partial implementation of the rule and suffering through the lingering effects of such disruption.

“I don’t know if firms are still going through the DOL hangover,” said Gary Baker, president of CANNEX USA, an annuity pricing platform.

Caught Off Guard

The across-the-board drop in annuities was the first time quarterly annuity sales have fallen below the $50 billion mark in 15 years, LIMRA reported.

Even with the S&P 500 up 4.5 percent in the third quarter, short-term benchmark lending rates up 75 basis points from a year ago and higher Treasury yields, the expected sales bump never came to pass.  The wilting sales took the industry by surprise.

“It caught a lot of people off guard,” said Hawkins.

Aggregate net flows for all individual annuity products are forecast to turn slightly negative in the aggregate this year and next, as well as in 2019, he said.

Net flows, or annuity premium minus the outflows for annuity benefits and surrender benefits, are crucial to the long-term health of the annuity industry.

Flows increase or decrease assets under management, or AUM, which generate fees and investment income.

“The negative turn suggests that annuity insurers will be under greater pressure to improve both net investment income and fee income,” Hawkins said.

After a disappointing third quarter, it may be a big ask for fixed annuities to turn in another record year in 2017.

Early indicators point to higher sales in the fourth quarter and are up “so it’s a good sign,” Giesing said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.
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