Fixed-indexed annuities (FIAs) were once largely restricted to the “Wild West” of the life insurance and annuity industry. It has since gained popularity and become one of the industry’s most important products. This article will examine some changes in this product category from 2011 to 2021.
The foremost FIA issuers
When it comes to FIA sales, those who were already strong have become even stronger. Apollo Global Management, Athene USA, and Allianz Life’s US subsidiary, Allianz Life, finished first or second in the FIA sales race for the 12th consecutive year in the last 18 years. Moore noted that the list of the 10 most popular FIAs for 2021 has remained remarkably stable since 2011. However, Athene, Allianz Life, and American Equity have always been among the top 10 in terms of sales.
Since 2011, AIG has been the largest life annuity company to break into the top 10 FIA issuers, while Jackson National Life has been the largest FIA issuer to withdraw in 2011. Also, private equity firms have increased their involvement in the FIA market over the past decade.
Revenue has doubled in 10 years.
FIAs have adapted well to low-interest rates over the past 14 years. The revenue reached a high of $65.513 billion in 2021, up from 58.235 billion in 2016 and $32.387 billion in 2011. Even though sales were down from the peak year of 2019, they were up from the $58.142 billion they reached in 2020 during the COVID pandemic.
The Bermuda Triangle element
Apollo was the first company to implement what RIJ refers to as the Bermuda Triangle model after purchasing Aviva in 2012 and rebranding it as Athene. Since then, the strategy has been widely imitated. It typically involves a Bermuda or Cayman Islands reinsurer, a Bermuda or Cayman Islands FIA issuer, an asset manager skilled in originating high-risk “leveraged loans” and other alternative assets, and an FIA issuer.
For example, in 2021, Athene USA used reinsurance to move billions of dollars of new FIA sales off its balance sheet and onto the balance sheets of reinsurers that were part of the holding company that Athene USA was part of.
Athene Life and Annuity of Iowa reported $22.4 billion in new annuity sales in 2021 on its annual statutory filing in Iowa. Athene Annuity Re of Bermuda and an Athene affiliate in Delaware received about $18.8 billion from Athene.
Wink, Inc. reported sales of indexed annuities worth $7.7 billion by Athene USA, but the company only reported sales of indexed annuities worth $775 million in its statutory filing.
When selling FIAs, independent insurance agents can earn more commissions than when selling any other type of insurance product. Financial incentives provided by life insurance and annuity companies in the late 1990s and early 2000s fueled the FIA industry. The average FIA commission before the financial crisis was more than 8%, and 9-11% commissions were not uncommon. Following the crisis, the average declined. The top-selling annuity pays a street-level commission of 6.5%, the maximum that wholesalers (such as field marketing organizations or FMOs) are permitted to advertise. The street rate does not include the ‘override’ received by wholesalers, which can be as high as 3%.
Commissions are greater for more extended surrender periods. The percentage of 10-year contracts sold has remained around 50% over the past decade.
In 2011, fewer than 15% of contracts had seven years or fewer surrender terms. This percentage increased to 25% in 2016 and 36% in 2021. Moore stated that the decline in commissions is due to the growing popularity of shorter surrender periods.
Contracts sold through bank and broker-dealer channels typically have shorter surrender periods. Sales of five- and seven-year bonds have increased as more firms serving the bank and broker-dealer channels have entered the market.
Almost 90% of FIAs were sold by independent insurance agents 10 years ago, at the end of the so-called “Wild West” era of the FIA industry. By 2016, additional distributors, particularly independent broker-dealers and banks, began carrying the product as an alternative to bonds with a higher yield.
In 2016, insurance-licensed advisers at independent broker-dealers and banks accounted for approximately 14% of sales, while the insurance agent channel share declined to 61%. In 2021, independent broker-dealer sales decreased to 10.8%, while independent agent sales increased to 65%.
For several years, FIA issuers have been adding “guaranteed lifetime withdrawal benefit” (GLWB) riders to their contracts. For the contract owner to get the most out of these riders, they usually need an explicit fee of 1% or more and a 10-year holding period. Even after initial income, contracts can revert to their principal, but if they do, their income could decrease.
In 2016, 20.4% of contract owners, on average, received lifetime income riders on their FIAs, according to her survey of insurers offering such riders. It is difficult to predict how many individuals will use them in the future.
Over the past decade, the FIA industry has remained essentially unchanged. People between the ages of 55 and 65 still purchase them. The products with the highest crediting rate continue to generate the most investor interest.
However, much has also changed. Distribution has expanded to include banks, independent broker-dealers, and independent agents.
The mainstreaming of the FIA may be the most significant change over the past decade. With the assistance of Wall Street, it has emerged from the shadows into the limelight. The FIA resisted the SEC and the Department of Labor’s efforts to regulate it more strictly.
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Bill and his associates of Faith Financial Advisors have over 30 years’ experience in the financial services industry.
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> Financial Services consultant since 1984
> FERS independent advocate and an affiliate of Public Sector Retirement Educators (PSRE), a Federal Contractor and Registered Vendors to the
> Affiliate of TSP Withdrawal Consultants
> His goal is to guide individuals into retirement with safe, and predictable choices for stability using forward thinking ideas and concepts.