At the start of 2008, the effective federal funds interest rate was 3.94% and poised to drop as the subprime crisis took hold and the Federal Reserve sought to reduce borrowing costs. In 2022, consistent rate hikes meant to tame inflation brought the rate to 4.1% by December.
In both circumstances, annuity sales were driven in part from investors fleeing to the safety of guaranteed returns from fixed annuity products, according to Todd Giesing, assistant vice president, LIMRA annuity research. In 2022, however, investors were doing so in a rising rate environment in which they could capture guaranteed returns from interest rates not seen in over a decade. The result, according to LIMRA research released Thursday, was the highest annuity sales on record and 17% higher than 2008 at a total of $310.6 billion.
“We have had such a unique year and set of economic circumstances driving investors to annuities for protection,” Giesing said in an emailed response. “Investors have not seen a long duration downturn in the equity markets since the Great Recession. Combined with rising interest rates, bonds were not a safe haven, while fixed-rate deferred, fixed indexed annuities, and registered index-linked annuities had record sales years in 2022.”
Giesing says LIMRA suspects investors were reducing risk in their investment portfolios by using annuities as a bond alternative. The outcome was sales driven by fixed annuity sales of $208 billion, 49% higher than the record set in 2019, according to the Windsor, Connecticut-based trade association. 2022 also saw record-breaking sales for fixed-rate deferred, fixed indexed and registered index-linked annuities.
This unique environment has driven annuities even higher than the last record reported by LIMRA. Geising notes that “annuity sales were flying high in 2007 on the back of traditional variable annuities and this momentum continued into 2008.”
But as economic conditions shifted, so did the sales of individual annuity products, moving away from variable to fixed, he says.
The Retirement Income Vehicle
The retirement industry has long viewed guaranteed income annuities as one answer to the retirement income conundrum, but the insurance investment products have not made much headway within defined contribution retirement plans, according to industry watchers and available data.
John Faustino, head of Broadridge Financial Solutions’ Fi360, a financial technology firm that works with advisers and asset managers, believes the boom in retail annuities may help usher in more guaranteed income annuities within DC retirement plans. He notes that the Department of Labor in 2021 noted that they were interested in increasing retirement income options, which combined with their push toward low fees in retirement plan savings makes an in-plan option make sense.
“The department of labor is really focused on lowering costs as they know fees are a drag on retirement savings,” Faustino says. “It’s going to be higher cost if you’re rolling your money out of plan for to purchase an annuity, so if everyone is seeing this demand in the market go up it makes sense to try and offer it [in plan].”
Faustino’s Fi360 recently released guidance for advisers and plan sponsors on retirement income, including in-plan annuities, and later this year will be coming out with a comparative tool to compare options, he says.
Fixed, Not Variable
In the fourth quarter of 2022, total annuity sales were $87.2 billion, a 39% increase from the fourth quarter of 2021, and the third consecutive quarter in which annuity sales set a new record, according LIMRA’s U.S. Individual Annuity Sales Survey
“Insurers have been able to offer very competitive crediting rates while protecting the principal investment from equity market volatility, making FIA products more attractive to investors for the foreseeable future,” Giesing noted.
Giesing forecasts moderate sales increases to fixed income annuities in 2023, and then further growth through 2025.
One annuity that faltered in 2022 and which Geising expects to continue on a downward trend is traditional variable annuity sales, which fluctuate depending on market conditions. In 2022, traditional VA sales totaled $61.7 billion, down 29% from 2021 results, according to LIMRA.
“To put these results into perspective, annual traditional VA sales peaked at $184 billion in 2007,” according to the LIMRA report. “Given the current economic forecast and competitive pressures, there is little expectation that sales will improve significantly over the next several years.”
LIMRA’s preliminary fourth quarter 2022 annuity industry estimates are based on monthly reporting, representing 83% of the total market, according to the association. Final results will be available from LIMRA in March, after the earnings results of participating annuity carriers, the association noted.