Inflation and volatile equity markets have bedeviled Wall Street and policy makers, but one sector that doesn't seem to be bothered by the adversity is the annuities industry.

Annuities have been enjoying record sales in recent months, and market watchers attribute much of the success to investors fleeing for safety in the face of a sinking equities market, preferring to move money to instruments with guaranteed returns and downside protection.

Meanwhile, the Federal Reserve's aggressive rate increases to combat inflation have afforded annuity companies the opportunity to up the payouts offered on their annuity products.

In the second quarter, according to LIMRA,  total U.S. annuity sales increased 22% to $77.5 billion, shattering a record set in 2008 during the Great Recession by nearly $9 billion.

“Continued equity market declines and rising interest rates drove investors to purchase record-level fixed-rate deferred annuities in the second quarter,” Todd Giesing, assistant vice president, LIMRA Annuity Research, said in a press release last month. “Our research shows fixed-rate deferred annuity manufacturers are, on average, offering interest rates more than four times that of a bank CD, which has made these products a tremendous value for investors looking for protection and growth potential.”

Fixed rate deferred annuities had more than $44.6 billion in sales for the first half of this year, which is an increase of 46% from the year before, according to LIMRAs' U.S. Individual Annuity Sales Survey,

Dylan Tyson, president of retirement strategies at Newark, N.J.-based Prudential, said the firm is seeking positive numbers in particular with its focal product, FlexGuard.

“Ultimately, products like FlexGuard and other products that we offer benefit from the higher interest rates,” he said. “It allows us to provide excellent upside potential for customers and very attractive downside protection.”

Jared Nepa, vice president and national sales manager of annuities at Philadelphia-based Lincoln Financial Group, concurred, stating that his firm has also seen positive inflows into the firm’s annuity products, but declined to provide specifics.

Nepa said the average investor is currently looking for a perfect combination of protection and growth, which annuities can provide. 

“Clients want to have their cake and eat it too,” he said. “They want protection but they don’t want to give up the upside, so it’s really been a perfect storm.”

But industry officials noted that in times of high uncertainty about the markets and the economy, as is the case now, downside protection is seen as especially valuable by investors.

“During periods of inflation, fixed indexed annuities may be more attractive to some investors because they offer some protection from market risks with the opportunity for greater returns if the markets perform well,” Mike Morrone, vice-president of annuity product development at Columbus, Ohio-based Nationwide, said in an email.

Total fixed-rate deferred annuity sales hit a record high in the second quarter, reaching $28.2 billion, which was 76% higher than a year earlier, according to LIMRA. In the first half of the year, fixed-rate deferred annuities totaled $44.1 billion, a 44% increase compared with last year.

Fixed indexed annuity sales were $19.7 billion in the second quarter, up 19% from prior year, and were $36 billion for the first half, a 20% increase from last year.

"Both FIAs and fixed-rate deferred products benefited from the significant interest rate increases in the second quarter," Giesing in a prepared statement. "Coupled with a nearly 20% equity market decline, investors sought out principal protection and growth potential, which these products offer."

Firms have been responding to the rising interest rates by offering increased rates of their own.

Lincoln raised its rates in May and July this year as much as half a percentage point for some age groups, while Nationwide raised its rates on multiple products more than 25 times this year, according to each firm. Prudential increased FlexGuard’s rates six times since the beginning of the year, Tyson said. He pointed to a recent example where the firm increased the upside growth potential for a popular protection strategy, which was the S&P 500 index, six-year-term, 20% buffer cap rate strategy. It was initially 175% and the firm uncapped it.

Another result of the increased interest rates has been a shift in the types of investors that have been looking to put their money in annuities, according to industry officials. In April, Lincoln conducted a survey of millennials and found that 80% of them are seeking products, including annuities, that offer growth and protection.

“We’re starting to see different consumers starting to dip their toe into the water,” Nepa said. “When you get some tailwind for rates, you start to get a new consumer starting to be interested ... and putting [a retirement product] into their portfolio a little earlier in their plan.”

Franklin, Tenn.-based Jackson National Life Distributors is among the companies that sees the high-interest-rate environment as an opportunity.

“The higher interest rate environment has allowed us the ability to increase the attractiveness of some of our benefit features on our flagship [variable annuity] living benefit offerings and VAs with guarantees,” Brian Sward, executive vice president and head of product solutions at Jackson, said in a statement.

It appears the conditions that have led to record sales for annuity companies will continue for the foreseeable future. Fed Chairman Jerome Powell announced last week in Jackson Hole, Wyo., that the central bank will continue to be aggressive in increasing interest rates to combat inflation.

To get the message about annuities out, firms are stepping up their messaging with financial advisors highlighting the advantages annuities have in this current market.

“Not every financial advisor is as used to being able to incorporate holistic portfolios that include both market value approaches ... but also instruments that have protected outcomes,” Tyson said.

Nepa expressed confidence in Lincoln’s variety of annuity products, saying they can accommodate all investors regardless of the markets.

“We want to be sure that our portfolio is broad enough so that when the trends shift, we’re able to shift with that trend,” he said.