Annuities in coronavirus slump as VAs draw regulatory and academic scrutiny

In a signal of the economic toll of the coronavirus pandemic, annuity sales are tumbling and shifting toward protection-based products.

Fixed-rate deferred annuities and registered index-linked annuities, also known as structured or buffered variable annuities, represent the bright spots. Broker-dealers are fueling sales of both products, according to the LIMRA Secure Retirement Institute. BDs generated 50% of the sales in the fixed-rate deferred category, up from 39% in the first quarter and 29% last year.

“This shift suggests Americans continue to be concerned about the economic impact of the pandemic and are seeking short-term solutions to preserve and protect their savings,” Todd Giesing, SRI’s senior annuity research director, said in a statement.

The dropping sales also came amid the June 30 effective date of the SEC’s Regulation Best Interest, and a new study about its vacated predecessor. Sales volume fell by more than 20% year-over-year in the second quarter, according to the Secure Retirement Institute and Wink.

Slumping annuity sales display the impact of low interest rates, stock volatility and social distancing upending operations, according to Giesing. “The focus this quarter was on protection-based solutions as equity market volatility had investors seeking safety,” he added.

Variable products have always drawn regulatory scrutiny, with a FINRA settlement on Sept. 2 by Wells Fargo serving as only the latest example. Though critics fault Reg BI for not being as strong as the Labor Department’s previous fiduciary rule, the defunct guidelines helped reduce sales of the most expensive variable annuities, according to an academic study.

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By the numbers

Fixed-rate deferred sales soared by 30% from the previous quarter to $12.8 billion, but they were still down 20% from the year-ago period, according to SRI. In their 22nd consecutive quarter of growth, RILA sales increased 8% year-over-year to $4.5 billion. Across all products, sales fell 24% from the same time a year ago to $48.6 billion.

Among VAs, sales declined 19% to $20.8 billion after four straight quarters of higher volumes. For fixed products, sales dropped by 27% to $27.8 billion. The RILAs are taking some of the business that had been going to fixed-index annuities, which plummeted by 40% to $12 billion. Lower crediting rates are making other products more attractive, according to Giesing.

The changing conditions coincided with a new issuer reaping with the most sales of fixed-index annuities, Wink CEO Sheryl Moore says. After more than a decade with Allianz at highest market share, Athene surged to the top of Wink’s fixed-index rankings at 11%. The outlook still appears bleak for most products, though.

“Everyone saw these sales declines coming from a mile away,” Moore said in a statement. “As everyone continues adjusting to COVID-friendly selling and the 10-year Treasury remains minuscule, sales are going to continue to be challenged.”

Jackson National reeled in the highest sales of any issuer at a 7.5% share of the market, according to Wink. New York Life, MassMutual, Lincoln and Equitable rounded out the rest of the top five sellers, in that order. Allianz’s 222 Annuity remained the highest selling fixed-index product for the 20th consecutive quarter, while Jackson National’s Perspective II VA drew the No. 1 sales among all products for the sixth quarter in a row.

Wells Fargo case

FINRA’s case revolved around client holdings in previously sold VAs that representatives of Wells Fargo Clearing Services and the Wells Fargo Advisors Financial Network switched into mutual funds, unit investment trusts and other products.

Over more than five years and 50,000 VA surrenders, reps made at least 101 “potentially unsuitable switches,”according to FINRA. Under the settlement, Wells Fargo agreed to pay a fine of $675,000, plus $1.4 million in restitution and interest for the clients who paid surrender fees and upfront sales charges in the transactions.

“We enhanced our platforms in August 2016 to include additional oversight measures confirming investment suitability,” Wells Fargo spokeswoman Jackie Knolhoff said in a statement. “We are pleased to have this matter behind us as the conduct at issue occurred between January 2011 and August 2016.”

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VA sales and fiduciary rule study

VAs also comprise a major part of a new academic working paper that’s under review for publication after it went online in July. Authors Mark Egan and Johnny Tang of Harvard University, along with Shan Ge of New York University, tracked the major impact to VA sales from the vacated Labor Department rule. Annuity sales were slumping at that time as well.

Sales of VAs dropped below $100 billion in 2017 for the first time in nearly 20 years as the rule went into partial effect. The researchers examined the relationship between sales and VA products’ expenses, commissions, subaccounts and other features.

The results were striking: Sales of VAs with the highest expenses fell by 43% more than the drop in sales of low-expense products. Clients paid an average 10% lower fees and commissions. Risk-adjusted returns increased by 92 basis points.

“In response to the rule, we find that brokers more than doubled the weight they put on maximizing investor returns when selling annuities,” the researchers concluded.

“Even after accounting for the decline in annuity sales and under conservative assumptions, our results suggest that investors, on average, benefited from the fiduciary rule,” they added. “Given that enforcement of the rule was limited and that the rule was ultimately vacated, our estimates may understate the impacts of fiduciary duty and the long term effects of the fiduciary policy remains a topic for future research.”