Despite a rough fourth quarter, 2019 turned out to be quite the banner year for fixed indexed annuity sales, according to sales figures released this week by both Cerulli Associates and the Secure Retirement Institute (SRI).
FIAs made up nearly 57% of total annuity sales in 2019, climbing to a new all-time high of nearly $74 billion, according to Cerulli’s latest report, U.S. Annuity Markets 2019: Adapting to Financial Advisory Trends.
SRI also had FIA sales pegged around $74 billion ($73.5), up 6% from 2018 results and surpassing the previous annual sales record for FIA sales set in 2018. This despite FIA sales dropping 13% in Q4 2019 compared to the prior year, which SRI researchers attributed to low interest rates and increased interest in registered index-linked annuities, which offer a similar value proposition.
“Much of the overall growth in the fixed market can be attributed to the continued growth in the fixed indexed annuity market (FIA),” said Todd Giesing, director, Annuity Research, SRI. “FIA sales have increased 11 of the past 12 years, accounting for more than half of the fixed annuity market sales.”
SRI’s Fourth Quarter U.S. Annuity Sales Survey found total 2019 annuity sales were $241.7 billion in 2019, an increase of 3% over 2018 results. This represents the highest annual annuity sales recorded since 2008.
“Fixed annuity sales have driven the overall growth for the annuity market over the past four years,” Giesing said. “Falling interest rates in the third quarter dampened fixed product sales in the second half of the year. As a result, most fixed products experienced declines in the fourth quarter, pulling down total annuity sales results for the quarter.”
Cerulli predicts further FIA growth
The Cerulli report credits favorable market conditions, growing acceptance from the broker/dealer (B/D) channels, and innovative product design features as factors that will contribute to further growth of the FIA market.
By 2023, Cerulli predicts FIA sales will outpace those of the total retail variable annuity (VA) marketplace.
In sharp contrast to the steady outflows VAs have experienced since 2012 due to derisking, FIAs are generating positive net flows. Bolstered by the overall performance of index strategies, as well as designs offering greater transparency (e.g., surrender charges, participation rates), FIAs allow insurers to both accumulate assets and keep assets in place to sustain profits.
According to the Cerulli report, FIAs should not be harmed greatly by Fed rate cuts, and if markets become volatile and or bearish, fixed annuities will once again serve as safe havens for risk-averse investors.
The repeal of the Department of Labor (DOL) Conflict of Interest Rule and passage of the SECURE Act also contribute to Cerulli’s optimistic outlook. “The threat of the DOL rule had been a key reason for reduced sales especially into VAs and FIAs. The passage of the SECURE Act may open the door for further growth,” according to Donnie Ethier, director at Cerulli Associates.
FIAs, offering conservative investors the opportunity to benefit from market gains without losing principal in a down market (in exchange for taking smaller gains in an up market), could prove to be a popular choice within retirement plans adding annuity options as a result of the SECURE Act.
The largest catalyst of growth, Cerulli says, comes from changing distribution dynamics. FIAs are accumulating assets at a solid pace for many B/Ds. The independent broker/dealer (IBD) channel experienced the largest 10-year gain in fixed annuity market share at nearly 8 percentage points; regional B/D market share has grown too, by almost 7 percentage points, according to the report.
“Broker/dealers have embraced the solution as products become more transparent and consumer-friendly,” Ethier said. “Investors value the product’s protection of principal coupled with tax-deferred growth of assets.”
The report finds that insurers are optimistic about the prospect of increased FIA sales within the independent agent and IBD channel—59% of insurers surveyed expect sales increases of 10% or more.
Insurers are innovating and appealing to B/Ds with tailored products. Cerulli expects this process will continue, if not accelerate.
“Insurers should continue to devise FIA features that will resonate with the B/D community and be open to developing fee-based models,” according to Ethier. “There will be a need for the solutions due to advisor migration to fee-based models and new regulations that should encourage—if not require—industry movement away from traditional upfront commissions.”
Of note, SRI’s report says fee-based indexed annuity sales continue to fall. In Q4, fee-based FIA sales were $140 million, down 17% from prior year. Fee-based products represent less than 1% of the total FIA market, SRI says.