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Annuities: Comfort Food for Uncertain Investors

Author

Todd M. Giesing
Assistant Vice President, Annuity Research
LIMRA and LOMA tgiesing@limra.com

September 2022

As we enter the second half of 2022, market volatility, rising interest rates, and the threat of recession are having an impact on the financial services industry. For annuity markets, second quarter 2022 sales reflect record-breaking positives and very few negative investor reactions to this economic uncertainty (Figure 1). It seems that, in times of volatility, consumers turn to annuities as their “comfort food” — shifting the emotional negative of an uncertain market into an investment positive. Insights into the different types of annuity sales can help companies looking to capitalize in this environment.

Figure 1 — Annuity Sales, First and Second Quarter 2022

By annuity type, $ in billions

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Source: Second Quarter Annuity Sales, LIMRA, 2022.

Registered Index-Linked Annuities

Registered index-linked annuities (RILAs) have had their best year-to-date ever. In fact, second quarter 2022 posted the highest-ever RILA sales, at $10.8 billion. This reflects an increase of 12 percent from the previous quarter and 8 percent from the same period in 2021, and it beats the previous record set in fourth quarter 2021 by $50 million.

We expect momentum for RILAs to continue, or at least remain stable, as more carriers enter the market. RILAs appeal to investors during periods of uncertainty because they provide downside protection paired with upside potential. This allows investors to capitalize on expected growth while avoiding potential downturns.

Fixed-Index Annuities

As interest rates continue to rise, fixed-index annuities (FIAs) posted their second-highest start of the year, with second quarter 2022 sales just shy of the previous record set in second quarter 2019. FIA sales landed at $19.7 billion, up 21 percent from the first quarter and up 19 percent from the same period in 2021. With rising interest rates, carriers are able to increase cap and participation rates, making FIAs more favorable. The momentum for FIAs should continue as interest rates continue to rise and carriers continue to increase benefits.

Fixed-Rate Deferred Annuities

Uncertain equity markets, rising interest rates, and a lack of alternative safe solutions have created the perfect storm for sales of fixed-rate deferred annuities (FRDs).

During periods of volatility, investors seek FRDs for their security and principal protection. FRD sales are no exception to the overall theme of record-breaking annuity sales so far in 2022. Second quarter FRD sales were the strongest ever, up 81 percent compared with the first quarter, 79 percent compared with the same period in 2021, and over 10 percent compared with the previous record set in the first quarter 2009. The average three-year crediting rate for FRDs increased from roughly 1.3 percent in June 2021 to almost 3 percent in June 2022.

Volatility and rising interest rates are not the only factors boosting FRD sales. The lack of competition is also aiding the FRD market. At the end of the second quarter, the gap between bank CD rates and average three-year FRD rates was more than 230 basis points (Figure 2). With interest rates rising, the resulting lower bond prices struggle to entice investors. This creates an environment in which FRD sales flourish.

FRD pending contracts in July 2022 are up 15 percent from the previous month and up more than 150 percent from July 2021. This indicates FRD sales are not likely to slow, especially if interest rates continue to rise and the equity market remains volatile.

Figure 2 — FRD Rates Versus Average CD Rates
October 2019 to June 2022

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Source: Second Quarter Annuity Sales, LIMRA, 2022.

 

Income Annuities

Income annuities have also seen the benefit of rising interest rates, with fixed immediate (SPIA) sales up 33 percent from the previous quarter and up 25 percent from 2021. Deferred-income annuities (DIAs) have also seen a boost, with sales up 42 percent from the previous quarter; however, and sales are up slightly (2 percent) compared with the same period in 2021. It is possible that some investors are holding off from purchasing income annuities in anticipation of even higher interest rates in the near future.

Traditional Variable Annuities

As the one aberration in an otherwise record-breaking year, traditional variable annuities (VAs) (excluding RILAs) saw their worst first half of the year since 1994. This reflects volatility in the equity market, which also saw its worst first half of the year since 1970.

Traditional VA sales of $16.5 billion in second quarter 2022 were down 11 percent from the previous quarter and 27 percent from the same period in 2021. We would have to go back to fourth quarter 1995 to see lower VA sales.

Given their ties to the equity market, traditional VA sales declines should come as no surprise. In fact, this reinforces the message that investors are shying away from equity-based solutions and seeking the comfort of guarantees in this uncertain environment.