I’m sure I’m not the only one who has noticed that it’s become expected of sports announcers and reporters to give predictions as to the outcome of upcoming games. This is most pronounced in pro football, I think, where some prognosticators not only give a specific score but even go so far as to say certain plays will occur, such as a blocked field goal, successful onside kick or “pick six.”
Well at the heart of this, in my opinion, is gambling, a pastime that used to be considered a harmful vice but now is omnipresent. The average person can now make a bet with the stroke of his finger across a touchstone screen.
And let me not get into why injury reports are so important in professional sports. That is perhaps self-evident.
So, what do these observations have to do with the annuity industry? It seems that some insurance equity analysts at Morgan Stanley are forecasting a sales windfall for some insurers this year, due to fixed annuities – MYGAs in particular – coming out of surrender and thus ripe to move to another annuity, which is usually what happens. The analysts are correct that MYGAs sold five or so years ago have much lower crediting rates than current ones, so it makes sense for owners to move on.
Many moons ago I recall how the industry sought ways to foster persistency, but it looks like now, it’s almost a given that annuities will move after their surrender charge periods are over, and this movement is even more likely if a better deal is to be found through higher crediting or some whizbang feature. Moreover, some carriers are touting the fact that vintage blocks are in “run off.” Not all outflows are unwanted, it appears.
But back to the Morgan Stanley analysts, whose note I have not read, rather I got the gist of it from an on online article published by Think Advisor. I was very surprised at some factoids presented, such as last year just 4% of annuity industry sales were from internal replacements (which I think makes sense), while 56% was from new, non-annuity money (this seems high) and 40% from external replacements (that seems low). These figures are, to me, like state secrets that never get divulged. Upon more careful reading I saw that these percentages were “according to a Morgan Stanley analysis of LIMRA data.” The italics are mine.
Now sell-side equity analysts are in the business of forecasting; they like to use sophisticated models to predict all manner of financial metrics for the publicly-traded companies they cover, whether earnings, ROE, ROI, to stock price movements. They get paid handsomely for this. They don’t have to be 100% right, just “directionally right” in order to be considered worth their salt.
In this instance I would certainly say the analysts are correct that large blocks of maturating annuities will be moving on – they estimate $70 billion or more will be on the table – but where will those dollars be moving? That’s the wild card, if you ask me. Fixed annuities might not garner such inflows for two reasons: one being they are capital-intensive, and insurers are moving to other alternatives, the other that crediting rates are on a downward trend due to interest rate cuts.
The Morgan Stanley guys think RILAs will benefit from these “shock lapse surrenders.” I think that likely also but would add that nowadays there are more competitors to annuities than ever, it seems, even when it comes to lifetime income (think IULs and how they are being presented). There’s no guarantee that the full $70 billion will remain in the industry.
In closing, I ask you, admittedly tongue-in-cheek: are we handicapping the industry now? Betting on potential outcomes? Don’t lay your money down just yet.