In a quarter marked by rising inflation, fears of recession and a volatile stock market, one financial instrument had a fantastic few months: annuities.
In the second quarter of 2022, total annuity sales in the United States reached $77.5 billion — the highest quarterly sales ever recorded by
"I think we're just seeing the beginnings of an annuity boom," said David Lau, founder of
Annuities, which are complex insurance contracts that convert payments into a lifetime income stream or lump sum payout, are sold as a way to protect retirement savings until income is needed. They typically do well during periods of economic upheaval. But this past spring, they sold better than they did even at the height of the Great Recession, when the previous sales record was set. Last quarter's total surpassed that 2008 high point by almost $9 billion.
That's good news for the products, which are technically insurance, not investments, but perhaps a troubling sign for the U.S. economy.
"Continued equity market declines and rising interest rates drove investors to purchase record-level fixed-rate deferred annuities in the second quarter," explained Todd Giesing, head of the annuity research program at LIMRA.
Not all annuities benefited equally from the surge. Sales of variable annuities, whose payouts can go up or down, fell by 32%, to $15.4 billion. At the other end of the spectrum, sales of fixed-rate deferred annuities soared to $28.2 billion — a 76% increase over the same time last year, and the best quarter LIMRA has ever recorded for the category.
In between those extremes, fixed indexed annuity (FIA) sales rose by 19%, up to $19.7 billion, and registered index-linked annuity (RILA) sales increased by 5%, up to $10.5 billion. With all these categories combined, total annuity sales in Q2 marked a 22% increase over the same time last year.
"Both FIAs and fixed-rate deferred products benefited from the significant interest rate increases in the second quarter," Giesing said. "Coupled with a nearly 20% equity market decline, investors sought out principal protection and growth potential, which these products offer."
Lau sees three factors driving the boom: economic uncertainty, rising interest rates and a need for new ways to diversify. The first factor is perhaps the most obvious; as stocks fluctuate and decline, annuities offer a rare advantage: stability.
"Consumers always crave certainty," Lau said. "People hate to see their portfolios drop, and they're looking for that certainty clients love, the certainty and protection that an annuity can provide."
Meanwhile, the Fed's historic interest rate hikes have pushed up bond rates, which in turn raise the payout rates from many annuities to "really attractive" levels.
But there's also another, less visible reason annuities are soaring, Lau said. In today's complex market, stocks — both domestic and foreign — and bonds are often inextricably intertwined, making it harder to diversify one's investments. Annuities offer an additional element that is truly separate.
"Financial advisors also see that it's hard to provide true risk management in a portfolio these days without insurance," Lau said. "It's hard to diversify and manage risk with traditional methods."
All these factors, in Lau's view, are driving up demand. On the supply side, the annuities themselves are also different.
"These aren't your father's annuities," Lau said. "This is a new breed of annuities that work within a fiduciary practice."
Many of the annuities available today — like the kind Lau's company brings to market — are commission-free, making them significantly less expensive. Those lower prices, combined with the products' increased demand and availability, are driving sales higher and higher — and Lau sees no end in sight.
"Now you're opening up a whole new world of advisors who can use the products," Lau said. "I think we haven't seen the heights yet."
