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Written By Scott Stolz, CFP, RICP
LIMRA recently reported that total U.S. annuity sales climbed to a record $216.6 billion during the first half of 2024, up 20% from the previous year.1 Not surprisingly, after hearing this stat, I witnessed a positive mood from the attendees associated with the annuity industry at the recently concluded LIMRA Annual Conference in Nashville.
After almost 20 years of no growth, annuity sales finally broke out of their narrow range and topped $300 billion for the first time in 2022. And now that it appears as though $400 billion is the new benchmark, how much longer will it be until $500 billion is eclipsed? In my view, annual annuity sales could get there sooner than expected.
With fixed, indexed, and structured annuities prices tend to get better when interest rates rise, and the opposite happens when interest rates fall. Ten-year treasuries peaked recently around 5% but now that the Federal Reserve has started cutting interest rates, because of this positive correlation, logic would suggest we should see a decline in sales in all three of these annuity product types as rates decline. The bigger question is when could this decline potentially happen?
The last time we witnessed ten-year treasuries at these peak levels was the summer of 2007. As interest rates started to fall, fixed annuity sales actually increased by over 52% from 2007 to 2009. This is because insurance companies don’t typically reduce the rates on their products overnight, they typically give 2-3 weeks’ notice. This gave advisors time to talk to their clients about locking in today’s annuity rates before the next rate cut.
The annuity industry, however, is very different today than it was in 2007. Back then, of the $256.8 billion in total annuity sales, $184 billion (71.6%) went into variable annuities – a product that has a low correlation to interest rates. Fixed indexed annuities were still in their infancy. According to LIMRA, total sales of that product were only $25 billion.2 Structured annuities (or Registered Indexed Linked Annuities) weren’t even on the drawing board. Fast forward to today, and the mix of annuity sales is very different. LIMRA reported that, in the 2nd quarter of 2024, fixed, indexed, and structured annuities represented 80% of total annuity sales, while traditional variable annuities made up only 14%.
The change in the annuity sales mix could have an interesting effect on a potential influx in to annuity contracts thanks to four key differences. First, back in 2007, annuity sales would have been mostly limited to fixed annuities. This time around, it could impact fixed, indexed, and structured annuities. Second, dozens of carriers might cut rates in the coming months compared to 15 or 20 carriers back in 2007. Third, there are significantly more pre-retirees and retirees today than ever before – many of whom have investment objectives that are more focused on the protection these three annuity types provide. And finally, the sales base on these three annuity types is significantly higher today, $340 billion compared to an $80 billion sales base in 2007. If carriers announce a series of rate cuts, they could create one wave after another of inflows into annuity contracts. The only question is will it be a three-foot wave or a tsunami? Given the unprecedented demand for protection, I’m expecting the tsunami. I just hope the industry has enough sandbags to survive it.
1. LIMRA: U.S. Annuity Sales Jump 26% in Second Quarter 2024, Fueled by Record FIA and RILA Sales.
2. US Individual Annuity Yearbook 2023 (limra.com).
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