The latest round of Federal Reserve rate hikes could push annuities to unprecedented sales growth over the next few years, according to Todd Giesing, assistant vice president and director of annuity research at LIMRA, the Windsor, Conn.-based market research concern.
Giesing’s forecasts are a continuation of current trends, but on steroids. For the past two quarters, annuity sales experienced record-breaking growth, as measured by LIMRA’s “U.S. Individual Annuity Sales Survey.” When the Fed raised interest rates by another 75 basis points this week—the sixth increase this year—and suggested more rate hikes to come, annuity sales got the shot in the arm they needed to keep soaring for the next couple of years.
“LIMRA anticipates a boost in annuity sales, as continued worries about equity market volatility and a possible recession have investors seeking safety,” explained Giesing in a press release.
The basic argument is that rising interest rates cause equity volatility. That, in turn, leads investors to seek safety. Annuities not only offer certainty in an unstable environment but also tend to pay out more than corresponding bonds. In fact, the higher the interest rates, the greater the annuity payout rates.
Giesing said that most Americans buy annuities either to protect their assets from market volatility or to create a guaranteed income stream in retirement, or both. “With protection being the key driver of sales, rising interest rates will continue to make annuities an attractive solution as Americans navigate challenging economic conditions,” he added.
But of course, not all annuities are alike.
Fixed annuities—sometimes called multi-year guaranteed annuities (MYGAs)—are most directly affected by interest rates. They return a predictable, guaranteed rate that’s correlated to prevailing interest rates.
Variable annuities (VAs), on the other hand, are linked to stock market performance via mutual-fund-like subaccounts. Even they can be positively affected by Fed rate hikes, however. If a subaccount’s value rises with the stock market, the percentage of those gains that’s credited to the annuity holder depends partly on prevailing interest rates. When rates are high, the crediting rates for VA holders increase accordingly.
The same is true for fixed-indexed annuities (FIAs), which credit annuity owners a portion of market index gains up to a predetermined cap. With these, there is also downside protection. If the index falls, annuity holders lose nothing.
“Bond yields play a significant role in the potential upside for a number of annuity products,” said David Blanchett, head of retirement research at PGIM, the investment management group of Prudential. The insurance companies that produce annuities tend to hold their assets in fixed-income instruments, and when they earn more, they offer their customers more. As interest rates rise, for instance, annuity providers keep raising the cap rates on fixed-index annuities. Lately, he added, they can’t seem to increase those caps fast enough. “As soon as they do, someone else beats it,” he said.