The annuity industry has two gusts of wind at its back going into 2023: a higher interest rate environment and the new opportunities provided by the SECURE Act.

That was the takeaway of a CFRA report released yesterday.

Total individual annuity sales jumped 22% in 2022 to $310.6 billion, said the report, written by Cathy Seifert, vice president at CFRA Research. Fixed-annuity sales were a big part of that increase, after they saw a 61% surge in sales. However, variable annuities dampened the party a bit with their 18% sales drop.

“CFRA attributes this [total annuities] strength to a rise in interest rates and heightened market volatility, which has propelled investors to seek stability in the form of fixed and indexed annuities,” the report said. “We expect this trend to continue and forecast a 14% rise in total annuity sales in 2023, driven by an expected 25% rise in fixed-indexed annuities, 20% growth in fixed-deferred annuity sales, and flat variable annuity sales.”

The firm expects fixed-index annuities to be the growth leaders in 2023 and 2024. “We forecast fixed-indexed annuity sales will rise by 25% in 2023 to around $99.3 billion and advance another 11% in 2024 to around $110.2 billion.” Total annuity sales should rise 14% in 2023 to $354.1 billion and by 10.7% in 2024, to $392.1 billion, CFRA said.

Fixed-index annuities are hybrid products that offer contract holders both a steady income stream and some participation in market performance, as well as return guarantees. They accounted for 26% of U.S. annuity sales in 2022, according to CFRA.

Variable annuity sales will likely remain flat even though they are an important chunk of the industry—representing 67% of total annuity assets at the end of 2022. Variable annuities offer a return based on underlying securities and accounted for 33% of 2022 sales.

The demand for annuity products usually increases after periods of difficult equity markets, said CFRA.

The Setting Every Community Up for Retirement Enhancement Act of 2019 and its more recent follow-up, SECURE 2.0., have broken down barriers that existed for annuities in the retirement space and led to their inclusion as investment options in retirement accounts.

“The SECURE Act … allowed annuities to be offered as investment options within 401(k) plans,” CFRA said. “Previously, employers held the fiduciary responsibility for ensuring these products were appropriate for employees’ portfolios. Now, the burden falls on annuity providers to offer the appropriate investment choices.

“The SECURE 2.0 Act, signed into law in late 2022 and effective January 1, 2023, tweaked some of the SECURE Act provisions related to (among other things) catch-up contributions, automatic enrollments in retirement plans, and the use of student loan payments as a qualifying payment for an employer match contribution.”

Private Equity Rises
This is all going to be a boon for annuities and the insurance companies that offer them, CFRA said, aiding companies such as American International Group and Equitable Holdings Inc., as well as private equity companies Apollo Global Management and KKR & Co. that have put stakes down in the annuities market.

Higher interest rates are also going to give annuities a big boost, since higher rates also mean bigger annuity returns.

The low interest rate environment over the last decade caused a shakeout in the annuities business, CFRA said, and a reshuffling that allowed private equity to get a leg up and a hand in.

“A prolonged low interest rate environment and heavy capital levels associated with this business led a number of insurers to shed their annuity businesses and pursue a more streamlined business model,” CFRA said. “Meanwhile, the (somewhat) distressed annuity assets that were coming to market were attractive to many private equity firms, who were searching for ways to increase their levels of perpetual capital (which is capital not subject to the drawdowns, capital calls, and exit strategies typically associated with private equity investments).”

CFRA noted a number of the transformative sales that have recently gone down in the annuity business: Allstate exited the business in 2021 after its sale of Allstate Life Insurance Company of New York to Wilton Re for $400 million and the sale of Allstate Life Insurance Company to Blackstone for $2.8 billion. The same year, American Financial Group announced the sale of its annuity business to MassMutual for $3.5 billion. AIG sold 9.9% of its Life & Retirement unit to Blackstone.

Among the PE players, Apollo Global Management bought out the remaining 65% stake of Athene Holding, a fixed and index-linked annuity provider, for $11 billion in 2022. In 2021, KKR snatched a majority interest in Global Atlantic Financial Group, a life and annuity underwriter.   

CFRA lists KKR as a “strong buy,” while it has a “buy” on AIG, Apollo and Equitable Holdings.

The firm has a “hold” on Lincoln National. While Lincoln’s annuities were a bright spot, the company reported an operating loss of $1.94 billion in its life insurance business in 2022.

“Risks to our thesis and recommendations include a greater than forecasted slowdown in worldwide economies, which would dampen demand for savings and retirement products, including annuities,” said CFRA.