Sales of fast-growing indexed annuities could eat into the VA market’s recovery, a Morningstar analyst said.
Regulatory relief and the Trump administration have provided a welcome tailwind for VA sales, which finally ended their long sales slide with a slight sales uptick in the second quarter.
But now the looming issue for VAs is competition from the indexed annuity market segment, said Michael Manetta, senior quantitative analyst with Morningstar.
“VAs are still outselling indexed annuities, but indexed annuities are growing much faster,” Manetta said. “That’s challenging going forward for VAs, and that may cap the rebound of VA sales.”
VA sales inched up in the second quarter to $23.6 billion from $23.2 billion in the year-ago period, the first time VA sales rose year-over-year in the past four years, Morningstar reported.
Indexed annuity sales, meanwhile, climbed 17 percent to $17.6 billion in the second quarter over the year-ago period, LIMRA Secure Retirement Institute data showed.
A decade or more ago, linking the VA benefit base to the market held strong appeal. But with more people turning risk averse, a guaranteed floor linked to the market — which indexed annuities offer — is likely to prove more attractive these days, Manetta said.
VAs are on track for sales in the $100 billion range this year, flat compared with last year, LIMRA analysts have said.
Indexed annuities are expected to turn in record sales this year, cresting $62 billion, said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of Wink’s Sales & Market Report.
“I agree — indexed annuities are the biggest threat to VAs,” said Moore. “If you ask me, indexed annuity sales are going to overcome variable annuity sales soon.”
Moore is projecting sales of indexed annuities to be $62.3 billion for 2018.
Same Insurers In Both Segments
While indexed annuities may turn out to be VAs’ biggest long-term challenge, if the same companies are selling both types of products, then the insurer isn’t likely to suffer in terms of overall sales.
But if upstarts begin to sell indexed annuities and eat into VA sales traditionally sold by legacy insurers, look out, Manetta said.
Manetta sees some parallels with the mortgage market, where lenders like Quicken Loans were able to establish a foothold in a market dominated by traditional mortgage lenders.
“It will be interesting to see who the big players are in the indexed annuity space and if they are different from the ones in the VA space,” Manetta said. “That might be an interesting dynamic.”
At the moment, the VA market appears to have stabilized, but whether it could decline still further is difficult to say, Manetta said.
The VA sales decline was already slowing, and there’s little reason to believe the decline would have continued much further. Still, the days when VAs were selling $40 billion a quarter aren’t going to come back anytime soon.
Independent Channel Racks Up Gains
Independent advisors also cooked up big market share gains in the distribution of VAs, the Morningstar analyst said.
Independent advisors accounted for more than 42 percent of all VA sales in the second quarter, up from 36 percent in the year-ago period.
Much of the gains came at the expense of the captive agency channel, which saw its market share plummet to less than 30 percent in the second quarter compared with 37 percent in the year-ago period, the data show.
Older VA contracts seem to be selling better than more recent contracts, and independent advisors may be more comfortable selling contracts dating from 2012-13 rather than contracts from 2017-18, Manetta said.
Another reason for independent advisors increasing their market share could be the surge in the numbers of people retiring or nearing retirement, and people relying on independent advisors to service those retirement portfolios, he said.
VA Growth ‘Minimal’
“It’s nice to see that the quarterly values have stopped that long slide, but growth is minimal,” Todd Giesing, annuity research director for LIMRA SRI, said of VA sales.
The top three sellers were Jackson, TIAA and AXA, LIMRA reported.
For a long-suffering segment of the annuity market, two major developments helped stem the ebbing VA tide.
In March, a federal court vacated the Department of Labor’s fiduciary rule and the Trump administration opted not to appeal the decision, effectively killing a rule that many VA sellers blamed for contributing to the decline in sales.
Rising interest rates also help make the living benefit features of VAs more attractive, and companies have loosened investment restrictions, which gives advisors more freedom in their investment choices, Giesing said.
‘Not Having The Same Success’
But VAs still face an uphill battle as insurance companies add competitive features to indexed products and rising Treasury yields make fixed annuities more attractive.
“Despite introducing new products and making changes to enhance their existing products to make them more competitive, companies are not having the same success with VAs as they are with fixed annuities,” Giesing said.
“In the VA market, we’ve had the regulatory issues and concerns that have diminished and we have better economic conditions that should help,” he said. “But we’ve also seen a shift and the pivot to indexed annuities, and they are growing much faster than the VA side.”
Indexed annuities and multiyear guaranteed annuities, or MYGAs, each posted double-digit percentage sales gains, LIMRA reported
Sub-segments of the VA market, like fee-based VAs and registered index-linked annuities, have done well as sales continued to climb — albeit from a very small base.
Second-quarter sales of fee-based VAs, which are designed to appeal to registered investment advisors, rose 49 percent to $850 million, LIMRA reported.
Fee-based VAs, however, represent only 3.3 percent of the total VA market.
Insurers and distributors are still adjusting their technology platforms to accept fee-based products, so there’s still plenty of growth potential for those VAs.
Fee-based VAs should eventually break the $1 billion-per-quarter sales threshold, Giesing said.
VA sales this year are expected to rise less than 5 percent over last year, according to LIMRA forecasts. Last year, VA sales fell 9 percent to $96 billion compared with 2016.
The days when VAs sold $30 billion or $40 billion a quarter are gone, “but we think VA sales will be level over the next three years at $100 billion a year to 2020,” Giesing said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]