By Heath Waddington, Senior Vice President of Sales & Marketing
Typically we ring in the New Year with an attempt to sum up the year that has just ended and give our thoughts on what the coming year may bring. While the look back may be relatively easy, the look ahead is proving to be extremely difficult. The Department of Labor fiduciary rule will continue to be the biggest topic facing the industry this year, just as it was last year, and will make any of our predictions suspect at best, given that the ultimate fate of the rule is unknown as I write this.
At the time of this writing we do not have a complete picture of how fixed index annuity (FIA) sales will end for 2016. It does look like 2016 will continue the multi-year trend of year-over-year record-breaking sales. According to LIMRA, FIA sales are projected to be over $60 million. That makes multiple years of record-breaking growth in terms of sales, and the first time FIAs have topped the $60 million mark in a calendar year. Sales of FIAs have continued to rise as variable annuity sales continue to contract.
While we think the future looks bright for FIA sales, it is likely that we will face a slowdown this year because of the new DOL rule implementation and applicability date, with LIMRA suggesting as much as a 30% sales drop. Insurance executives we have spoken with have given predictions ranging from a 20% drop to an actual increase in 2017. Assuming the rule takes effect as is, Ann Arbor Annuity Exchange (AAAE) feels that we can expect a decrease in FIA sales this year, however we do think the first quarter will be extremely strong. If the rule is significantly altered, or perhaps even thrown out (dare I say!), we see no reason that FIA sales should not continue their historic rise.
A big factor affecting FIA sales this year will be what interest rates do. The U.S. 10-Year Treasury Note started 2016 in the 2.25% range. As of late December 2016, the rate is in the 2.30-2.40% range. But these similar start and end points obscure what happened in between! The rate started a slide that hit bottom in July at 1.366%. This put tremendous pressure on annuity product pricing and carriers responded by lowering caps and benefits, raising spreads, and cutting commissions. Imagine what sales could have been if the interest rate environment had been more favorable!
For 2017 AAAE is cautiously optimistic that the Federal Reserve (Fed) will begin to raise the overnight rate. This does not always translate to an increase in longer-term bonds like the 10-Year Treasury Note, but there are many signals pointing to higher rates in general. That will help carriers deliver more value to consumers in 2017.
As always, FIA sales will also be affected by how the stock market performs in 2017. It is funny what a difference a few weeks can make. Just prior to the election, most articles that you read had forecasted tough times if Donald Trump managed to win the election.
Move forward to a few weeks after Trump’s surprising win and what actually happened is that the market stabilized very quickly and the Dow Jones Industrial Average crossed the 19,000 mark to hit all-time highs. In the short-term, it seems as if many analysts got it wrong, and have now changed their tune. If President Trump is true to his word, expect heavy government investment in defense and infrastructure projects. Last year we said we were wary of equities, given that the markets were at all-time highs. We feel the same this year. Markets are at new all-time highs and they seem ripe for a correction now that the Fed is no longer propping up the U.S. economy.
It is impossible to do a recap/look forward for the fixed annuity industry this year without talking about the elephant in the room: the DOL fiduciary rule. As you are all aware by now, the rule was officially published in April 2016, and in a last minute change, FIAs were placed under the best interest contract exemption (BICE) in order for commissions to be paid. In doing so, the DOL has upped the standard from one that ensures that producers are making sales that are suitable for their clients to one that mandates that those sales are in the best interest of their clients.
Those who sell FIAs and receive commissions will now need a qualifying financial institution (FI) with a supervisory structure verifying that the sale is in the client’s best interest, therefore, enabling them to sign the contract. While marketing organizations were specifically named as not qualifying as FIs, the DOL did lay out a path for them to get an exemption and attain FI status. AAAE is currently moving towards that with a sister company that has applied for FI status.
There are three possible outcomes with the DOL rule: it gets reversed, its implementation gets delayed, or it goes into effect as written. As soon as the rule came out, multiple lawsuits were filed in an effort to delay or reverse it, and the new administration of President Donald Trump could also delay or reverse the rule. Not all of the lawsuits have been ruled on as of this writing, but the first two rulings that have been issued were in favor of the DOL. While there is some murmuring that one of the remaining lawsuits has a much better chance, it is probably a good idea to prepare yourself for the rule to go into effect as written.
AAAE is unable to count on reversal or delay, so we will continue to prepare for implementation. While we support efforts to oppose the rule, we feel that producers should be working to align themselves with an FI that can properly supervise their business to ensure compliance with the rule.
Regardless of what happens in 2017, AAAE feels confident that fixed annuities and FIAs serve a vitally important purpose for the massive wave of retirees that are leaving the workforce each day for the next several years. The need for retirement income is increasing and annuities are the only products that can guarantee an income for life. If you have any questions about how these products may be a fit for some of your clients, or about doing business in the new environment, please feel free to call us at 800.321.3924.
Heath Waddington | Senior Vice President of Sales & Marketing
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x140 | Dir: 734.786.6140
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Ann Arbor Annuity Exchange does not provide tax or legal advice. You are encouraged to consult your tax advisor or attorney.
The opinions and views presented are those of the author and are not meant to predict future results.
 "LIMRA Secure Retirement Institute: Fixed Indexed Annuity Sales Record Strongest Growth in Third Quarter" LIMRA. Web. 21 Nov 2016. Accessed on 12 Dec 2016 at http://www.limra.com/Posts/PR/News_Releases/LIMRA_Secure_Retirement_Institute__Fixed_Indexed_Annuity_Sales_Record_Strongest_Growth_in_Third_Quarter.aspx
 "LIMRA Secure Retirement Institute Predicts Indexed Annuity Sales to Exceed $60 billion in 2016" LIMRA. Web. 2 Aug 2016. Accessed on 12 Dec 2016 at http://www.limra.com/Posts/PR/News_Releases/LIMRA_Secure_Retirement_Institute_Predicts_Indexed_Annuity_Sales_to_Exceed_$60_billion_in_2016.aspx
 10 Year Treasury Note (CBOE Interest Rate 10 Year T No ˆTNX). Yahoo Finance. Web. Accessed 30 Nov 2016 at http://finance.yahoo.com
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