Structured annuities see gains in otherwise slumping market

Fixed and variable annuity sales fell on opposite sides of the $100 billion mark in 2017, with fixed purchases at unprecedented highs and variable contracts near a 20-year low.

Total sales for the year fell 8% to $203.5 billion as the fiduciary rule cut into purchases of IRA annuities, according to the LIMRA Secure Retirement Institute’s fourth-quarter survey. On the other hand, independent broker-dealers led a 25% jump in structured annuity sales to $9.2 billion for the year.

Issuers have been launching structured products over the past year in a raft of so-called hybrid offerings designed for a combination of income protection with upside potential. Overall sales, though, dropped in the second and third quarters to levels unseen since the collapse of the dot-com bubble.

The Department of Labor rule has increased scrutiny of the products’ commissions and other fees. Its partial implementation made a major impact on annuity sales in the individual market, although it was more pronounced in IRAs than in nonqualified accounts, according to the industry research organization.

Quarterly annuity sales ticked down by $200 million year-over-year to $51 billion in the fourth quarter, with variable products diminishing in popularity and fixed contracts growing. Revenue from variable products decreased 2% to $24.7 billion, while fixed product revenue increased 2% to $26.1 billion.

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Variable sales declined by 9% to $95.6 for the year, shrinking below $100 billion for the first time in almost 20 years. Fixed contracts decreased by 8% to $107.9 billion last year, but the industry research organization says it was the first time ever that fixed sales topped $100 billion for three years in a row.

Although LIMRA had predicted a sales slump in 2017, the organization revised its estimates for 2018 upward this past fall after President Trump’s administration delayed major provisions of the fiduciary rule until 2019. Structured products emerged as a bright spot for sales in 2017 in an otherwise grim market.

“Structured annuity sales continue to attract individuals looking for a balance between investment return and downside protection,” Todd Giesing, LIMRA’s director of annuity research, said in a statement. “Structured annuity sales saw impressive growth through independent BDs in 2017.”

Structured products now make up about 5% of overall annuity sales, compared to 28% for fixed index annuities and 17% for fixed-rate deferred annuities. Both types of fixed products saw drop-offs in 2017, with FIAs slipping by 5% to $57.6 billion in their first decline in sales since 2009.

The reduction did line up with the lower end of the 5% to 10% rate forecasted by LIMRA last year amid the overall contraction across all products, though. FIA sales set a record in 2016, and the organization expects them to rise by 5% to 10% in 2018.

Flux in interest rates disrupted purchases of the fixed-rate deferred contracts, which fell by 12% last year to $34.2 billion, according to Giesing. Sales of the products, which include both book value and market value-adjusted annuities, decreased 4% in the fourth quarter to $7.4 billion.

“Sales of these products generally align with the 10-year Treasury rate, yet that didn’t occur again this quarter,” Giesing said. “People just seem to be looking for shorter-term investments anticipating increases in interest rates in 2018.”