Good news for insurance companies and customers who purchase their retirement-income products. In the first quarter of 2018, purchases of fixed index annuities rose 10% when compared with the same period last year. Not only that, overall fixed annuity sales also saw a significant upward swing.
Fixed index annuity sales were $14.2 billion for the first quarter, according to Wink’s Sales & Market Report, a leading resource in the insurance industry for indexed annuity sales. Not only did sales rise year over year, they were also up 4.4% when compared to the previous quarter, Wink reports. Index annuities have a floor of no less than zero percent and limited excess interest that is based in part by the up-or-down movements of an external index, such as Standard and Poor’s 500®.
Another financial research firm, LIMRA, also observes that fixed annuity sales are on the rise. It projects sales of fixed-rate annuities to reach more than $50 billion by 2019. LIMRA calculates that this is close to 50% greater than the $34 billion in purchases of fixed-rate annuities reached last year.
Still, these strong numbers are short of the record—$60 billion plus. That figure was spurred by retirement savers seeking conservative market protection and guaranteed income strategies in the wake of the Great Recession.
Overall, LIMRA forecasts all annuity sales will grow 5%-10% year-over-year in 2018. And they may even rise up up to 5% in 2019.
A New Record for Annuity Purchases
Sheryl Moore, a leading expert and market researcher in the indexed life and indexed annuity industries, is president and CEO of Moore Market Intelligence and Wink, Inc. Her firm publishes industry market intelligence in Wink’s Sales & Market Report.
“I look forward to seeing how improvements in interest rates will affect sales throughout the remainder of 2018,” Moore says. “We haven’t had an increase in indexed annuity sales this big in nearly two years.”
Forecasting trends for fixed index annuities in a recent article on ThinkAdvisor.com, Moore said, “I look at a couple of things when I forecast sales for indexed annuities. One is where variable annuities sales stand. The other is the volatility in the market. If there is a lot of volatility in the market or the market is going down, I’m forecasting indexed annuity sales are going to go up.”
10-Year Treasury Plays into Industry Performance
Moore says the primary barometer for indexed annuity pricing is the 10-year Treasury rate. In her view, if the 10-year Treasury goes up, that could make indexed annuities rates more attractive. Also affecting indexed annuity rates is volatility. This comes into play when insurance companies price their annuity options, which then affects the indexed-linked component of indexed annuities, she adds.
Two questions Moore is often asked are: How much are interest rates going to up? How will that play into indexed annuity sales? She believes if the Fed continues its plan to increase rates multiple times in 2018, the result will be positive for indexed annuity sales.
“Even before the Fed announced rates were going up, I was projecting indexed annuity sales were going to be up,” she told ThinkAdvisor.com.
Growing Market Can Mean Growing Benefits
For consumers looking for strategies to protect their wealth, a rise in annuity sales spells good news. As numbers of annuity owners grow, insurance companies gain more opportunity to innovate and develop new products for consumer needs. And existing product lines can be updated with new benefits, or strengthened benefits, that bring more value to the policyholder.
Increased sales also help strengthen the balance sheets of insurance companies, which must maintain dollar-to-dollar reserves for every dollar of annuity premium they assure. Many insurance companies maintain a solvency ratio above the dollar-to-dollar reserve requirement by state insurance regulators.
Reserve requirements for insurance companies are more stringent than those for banks, generally speaking. According to the Board of Governors of the Federal Reserve System (based on certain factors), banks must maintain a 3%‐10% ratio of reserves to total liabilities. In other words, that is $0.03‐$0.10 in reserves for every dollar deposited.
Banking institutions must maintain these reserves in cash or cash‐equivalent assets. Of course, banks also have the backing of the FDIC while insurance carriers don’t.
Insurance Companies Maintain High Capital Reserves
In contrast, an insurance company has to meet the higher dollar-for-dollar reserve requirement, and as mentioned earlier, many carriers choose to exceed that standard. If an insurance carrier had a solvency ratio of 104, for example, it would have $1.04 in reserves for every $1 dollar a client puts into an annuity contract.
Because of those capitalization requirements, the comprehensive legal reserve system, and a reinsurance system used by many carriers, annuity policyholders have quite a few layers of protection for their money.
Must De-Risk for Retirement, Economist Says
Well-regarded economist Roger Ibbotson, argues in a recent interview with WealthManagement.com, that fixed indexed annuities have the potential to outperform bonds in the near future. He predicts this would smooth the return pattern of a portfolio, given fixed indexed annuities’ downside protection.
Ibbotson is best known for his consideration of the measure of risk one should face when preparing for retirement. Pursuit of a higher return risks volatility, which could pose a considerable threat to those entering retirement.
“I’ve always recognized you have to de-risk, and we see that bonds are not necessarily the way to go today because the yields are so low,” Ibbotson told WealthManagement.com. “It’s pretty hard to have a falling rate environment today, when yields are below 3 percent on bonds. I’m not necessarily advocating you go all in” on fixed indexed annuities, Ibbotson says. “I think combinations of stocks and bonds and fixed indexed annuities are good.”
Should Annuities Be Part of Retirement Portfolios?
Sheryl J. Moore believes everyone would do well to investigate whether annuities should play a role in pursuing their retirement goals.
“I don’t sell or endorse any product or company, I’m just passionate about annuities and life insurance and want to make sure consumers learn about them,” Moore told ThinkAdvisor.com. “I want to make sure consumers learn about them so they can make an educated decision on whether or not they’re good for them.”
Need Help with Exploring Your Options?
Many retirement savers are attracted to annuities for a number of reasons, from guaranteed income and protection against market volatility to supplemental retirement cash-flow. Hundreds of annuity products are available in today’s market. If you believe you could benefit from professional guidance, 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.