Annuity Surprises Could Be Jump-Starters

July 18, 2012

The annuity market is never short on surprises, and the past few weeks have been no exception. Sometimes the surprises are jolts. This time, they are more like jump-starters.

For instance, two annuity resources reported upticks in their annuity activity data. This is despite the general sluggishness in the annuity business that’s been showing up in the more recent sales data.

One of these is the Depository Trust & Clearing Corporation (DTCC) Insurance & Retirement Services (I&RS). The New York firm says that the annuity inflows it processed in May reached $7.5 billion, up by just over 1 percent from $7.4 billion in April.

That increase is not a jaw-dropper, but it’s certainly interesting given that the overall trend in activity recorded by DTCC has been down in the past 13 months. The high during the 13-month period occurred in August 2011, when inflows were over $8.6 billion.

Inflows reflect the annuity transactions that DTCC processes daily for the industry through its Analytic Reporting for Annuities online service. Whether the upturn in those inflows reflects more firms using the annuity service and/or more use of the service by existing firms, annuity professionals will likely view the May bump-up as positive, especially in comparison to that the 13-month history reported by DTCC.

More income annuity quotes

Another surprise comes from CANNEX. It says it processed 9,000 more quotes for single premium income annuities in second quarter 2012 than in first quarter. The Springfield, Mass. firm tracks searches for single premium income annuity premiums, products and companies that financial advisors submit in the U.S. on behalf of clients.

Total quotes for second quarter came to nearly 131,800, up from nearly 122,700 in first quarter, the company says.

That suggests either more advisors were seeking income annuity quotes on the firm’s system, and/or that same number of advisors had increased their income annuity quoting activity. Either way, the quote search numbers seem to mesh well with another annuity surprise—the 23 percent increase in income annuity sales that Beacon Research recently reported for first quarter 2012 over the same quarter last year.

Beacon points out that first quarter income annuity sales did not perform as well on a quarter-over-quarter basis. Sales for the products were down by 3 percent compared to fourth quarter 2011, the Evanston, Ill., firm says. Then again, total annuity sales were also down, quarter over quarter, so the decrease may not be significant.

When second quarter sales numbers come out in a few months, it will be interesting to see if the quoting activity detected by the CANNEX system shows up in income annuity sales reported out by Beacon. If more quotes are being made, could more sales be far behind?

At least one company will be contributing to any uptick that may show up in the second quarter income annuity sales numbers. That is New York Life. The carrier is reporting that premiums for its Guaranteed Future Income Annuity product (a deferred income annuity it has been distributing since July 2011) totaled $500 million by June 2012. In the commodities market, that would buy a lot of bananas, so to speak.

Not a swap

Yet another surprise came from Washington. Last week, the Commodities Futures Trading Commission and the Securities and Exchange Commission jointly issued rules they have approved that will define derivative products such as swaps.

As readers will recall, unregulated use of swaps and related derivatives played a key role in the mortgage-backed securities dealings that were central to the financial downturn of 2007-2009. The 2010 Dodd Frank Act enacted in the aftermath of the meltdown required the federal agencies to develop the definitions as part of sweeping financial reforms. Now those definitions are complete.

In terms of everyday life insurance and annuity dealings, having swap definitions firmed up might appear to be no big deal. After all, most life and annuity professionals do not think of, or present, their products as swaps.

However, at the industry level, the definitions are a very big deal. Life insurance and annuity experts have been concerned that the final regulations might somehow include insurance and annuity products in the swaps definition. If that were to happen, they warned, some insurance and annuity products could become subject to federal regulation as swaps. The impact on the current state regulatory system is hard to fathom.

Now, for the surprise. It appears to be a good one for the insurance and annuity sector, and state regulators too.

The final rules appear to exclude life insurance and annuity products from the definition of swaps and related derivative products.  See this Securities and Exchange Commission summary and in particular, its discussion titled Products that Are Not “Swaps” or “Security-Based Swaps.”  Also see the Draft of the final rules from the Commodity Futures Trading Commission.

Unless something changes to alter that interpretation, that development spells “relief” for interests who want to preserve state regulation of insurance and annuity products.

Note: The Securities and Exchange Commission points out that, “Once both agencies adopt the final rules, they will become effective 60 days after the date of publication in the Federal Register.” Until then, the federal agencies continue to refer to the rules as a draft. But insurance experts are treating them as final, and they are now combing over the language for analysis purposes. Look for industry commentary about this in the coming weeks and months.


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