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Annuity Sales Surge, Good or Bad for Insurers?

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2022 saw annuity sales surge to a record-breaking $310.6 billion. According to LIMRA this is 22% higher than 2021 and 17% higher than the previous record level set in 2008 during the Great Recession. What is causing this annuity sales surge and how is it impacting insurers?

What Is an Annuity

CNBC.com defines an annuity as a lump sum of money, often taken out of a retirement plan, which is converted into a future stream of income, or annuitized.” Insurance companies, the only issuers of annuities, guarantee payments for a set period of time ranging from payouts of 2-5 years or for life. Payments can also be deferred to a specific point in time or taken immediately.

Investors like this guaranteed stream of income. It keeps them from worrying about running out of money and seems to match how Social Security and pensions work.

Insurers base payouts on the rate of return they think they can get over time and the insured’s life expectancy.

Why the increased interest now in annuities

“It was a very unique year in the individual annuity market,” said Todd Giesing, AVP of LIMRA annuity research. “We saw interest rates rise very quickly during the year, which helps sales of all annuity products. At the same time, equity markets saw a lot of stress, so investors were looking for protection.

2022 saw the S&P 500 post its worst loss since 2008 at 19.4%. The U.S. Federal Reserve raised interest rates aggressively to try to stop high inflation causing anxiety about the economy tipping into a recession. Of course, the higher interest rates also translated into a better return on investment for annuities. Usually U.S. bonds are this safe harbor but they suffered their worst year ever in 2022 as well.

The demographic trend of more people entering retirement, some involuntarily due to the pandemic, also has added to the growth of this type of investment. The average buyer is around 63 years old according to LIMRA.

Interest also depended on the type of annuity. Annual sales of variable annuities were the lowest since 1995 at $61.7 billion as consumers shied away from an investment tied directly to the stock market. Indexed annuities, while also tied to stock market performance, have capped earnings on the upside and the downside and saw a record-breaking quarter of $23.1 billion up 42% from the first quarter of 2022. Fixed-rate deferred annuities were $40.9 billion in the first quarter of 2023, 157% higher than the first quarter of 2022. These work like a CD with insurers guaranteeing a rate of return over a set period of time usually three to five years and buyers are reassured by getting their money back at the end of the term.

Why aren’t insurers making money off the annuity sales surge?!

Rising interest rates should be a positive for insurers as should the annuity sales surge, but insurers income doesn’t always correlate directly with sales. What does correlate is what the insurers DO with the money they take in from sales. Managing the bottom line is also more difficult for insurers with less-diverse product lines. Life/annuity insurers recorded incredible increases in sales in 2022 but small earnings.

For the past several years as interest rates remained near zero insurance companies sought partnerships with private equity firms. Other old-guard insurers split life insurance and annuity units into separate companies.

“Higher rates should lead to more favorable results for the life industry over the longer term, “ Doug Baker, Director in Fitch Ratings’ U.S. insurance group said. But Baker did go on to say “… a severe or prolonged economic downturn would likely pressure the industry.”

Interested in discussing your career or hiring needs in actuarial science? Contact Smith Hanley Associates’ Executive Recruiter, Rory Hauser at rhauser@smithhanley.com

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