Fixed Annuity Sales Rise to Near-Record Levels

Rising interest rates and an easing regulatory environment are contributing to near-record levels of fixed annuity sales. It’s good news for people who might rely on these fixed contracts for guaranteed income or protection. A strong marketplace can lend to new innovations, contract benefits, and contract features.

In the second quarter of 2018, total fixed annuity sales reached $33.7 billion, an 18% increase over second quarter 2017 sales. That figure shattered the quarterly benchmark, according to the LIMRA Secure Retirement Institute (LIMRA), a financial industry research firm.

Year-to-date, total fixed annuity sales were $60.9 billion, 9% higher than the first half of 2017, LIMRA reported.

Why all the excitement and elevated interest in fixed annuities? Two possible reasons – rising interest rates and relaxing regulatory pressures on financial markets.

“These products offer a unique value for retirees and pre-retirees seeking protected accumulation and guaranteed lifetime income features,” says Todd Giesing, LIMRA’s annuity research director, in an interview with InvestmentNews. “Clearly, with the Department of Labor’s (DOL) fiduciary rule vacated and the prospect of continued rising interest rates, demand for this product is high.”

Growth Benefits Carriers and Consumers

All of the top 10 insurance companies that manufacture fixed annuities reported double-digit growth from the first quarter 2018, LIMRA details in its report.

“The only other time (sales) were higher was right in the peak of the financial crisis as we saw a flight to safety and people getting out of equity-based products and looking for principal protection,” Giesing adds.

Just as insurance carriers are benefiting from higher sales, so are the consumers who depend on their products. As higher sales strengthen their balance sheets, insurance carriers are better able to add features and benefits to their products.

“These products offer a unique value for retirees and pre-retirees seeking protected accumulation and guaranteed lifetime income features,” Geising adds.

And greater growth potential on the conservative instruments insurance carriers invest in can lead to added features or benefits coming without additional rider costs. Not only that, annuity features or benefits already on the books in existing product lines can also be enhanced.

If particular rider benefits do come at a cost, insurers must price them competitively in today’s market. Just one more way consumers benefit from the current sales climate in the fixed annuity marketplace.

And this growth trajectory should continue, according to Giesing. “LIMRA SRI is forecasting 5-10% growth in 2018. Rising interest rates will benefit income annuity sales,” he says.

Stronger Capital Reserves Bolster Safety of Annuities

Safety can be a concern for consumers who are more familiar with the characteristics of certificates of deposit and bank accounts, which are insured by the Federal Deposit Insurance Corporation (FDIC). Annuities, by contrast, are backed by the claims-paying ability of the insurance carrier.

With higher annuity sales bringing in more revenue, insurance carriers are able to build up stronger capital reserves. This is key because insurance carriers are required to maintain dollar-to-dollar reserves equal to each annuity premium dollar. Most go above that dollar-to-dollar solvency ratio required by each state’s insurance regulators.

Banks are not required to meet the same stricter solvency ratios required of insurance carriers.

The Board of Governors of the Federal Reserve System (based on certain factors) requires banks to maintain a ratio of reserves to total liabilities of 3%‐10%. This translates into banks having $0.03‐$0.10 in reserves for every dollar deposited. These reserves are in cash or assets that are equivalent to cash.

Interest Rates Expected to Keep Rising

Rising interest rates equate to higher annuity payouts, making them more appealing to consumers. The good news for annuity owners is that rates are expected to continue to rise. During the Great Recession of 2007-2009, interest rates were lowered by the Federal Reserve to close to zero in an effort to prevent an even greater economic decline.

Now interest rates appear to be on a steady march upward. For the seventh time in three years, the Fed recently increased its benchmark interest rate. Analysts expect the Fed to enact two more rate hikes by the end of 2018, bringing the range to between 2.25% and 2.5%.

The Fed began incrementally increasing its baseline interest rate in late 2015. According to Wink Inc., an annuity industry research firm, the average point-to-point cap on index annuities increased from 3.81% to 5.37% during that period.

Conditions are Right for Annuity Sales to Keep Growing

LIMRA forecasts sales of fixed index annuities to increase each year through 2020.

The research group expects annuity sales for 2018 to record a 5% to 10% increase, which is near the record sales levels set in 2016. Expected rising interest rates and stronger guarantees are prompting LIMRA to predict indexed annuity sales will improve an additional 5% to 10% in 2019.

The Department of Labor fiduciary rule, which was set side earlier this year, would have resulted in increased investment-advice standards in retirement accounts. Many believe this would have made products like fixed indexed annuities more difficult for many financial professionals to offer to their clients.

Need Help with Your Retirement Strategy?

For people nearing retirement — or already there — there may be a place for the guaranteed income or protected accumulation assurances of annuities in their portfolios. If you think an annuity contract might be right for you, it’s important to explore your options.

Because there are many flavors and varieties of annuities — not to mention in actual products — you may consider working with an independent advisor or agent. Unlike captive parties, independent financial professionals can shop around from many insurance carriers for various options.

They may be able to offer you a wider assortment of solutions for your unique, personal needs. On the other hand, captive annuity agents tend to be closed to just one or a few insurance carriers.

If you are ready to investigate the potential for an annuity strategy in your financial plan, help is a click away. Independent financial professionals at SafeMoney.com can assist you. Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.