(Bloomberg) — An insurance product that customers use to help fund their retirements is selling at record levels, powering demand for corporate debt and business mortgage bonds.
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Last 12 months, sales of annuities, which enable consumers to effectively buy income for the remaining of their lives, reached an all-time record high of $385 billion, in response to life insurance trade group Limra. That’s up 23% from the 12 months before. The products grew more attractive as rising rates of interest translate into higher potential annual payouts from the products.
Behind the scenes, the life insurers that typically sell annuities are buying bonds to generate income for the products, and specifically, corporate debt and asset-backed securities including mortgage bonds. Their demand might decline a bit this 12 months after bond yields have fallen, but Limra says annuity sales are still expected to remain strong by historic standards.
The insurers’ bond purchases underscore how demand for numerous debt securities now might be driven by demographics, and illustrates why valuations for corporate bonds can remain high whilst the Federal Reserve keeps monetary policy relatively tight.
“Key drivers for credit demand for the time being are retail and pensions on the lookout for higher all-in yields, and annuity sales driven by more baby boomers retiring and by a greater level of rates of interest giving policyholders higher monthly payments,” said Torsten Slok, chief economist at Apollo Global Management.
Money raised by annuities often goes toward investment-grade debt, normally fixed-rate and ranging between three to 10 years — broadly consistent with annuity durations, said Deutsche Bank AG strategist Ed Reardon.
For investment-grade corporate bonds, demand from annuities and other investors catering to retirees are helping to keep up valuations high. The everyday risk premium, or spread, on a corporation note rated BBB- or higher is 0.95 percentage point, near the tightest level throughout the last two years.
Throughout the last twenty years, spreads have averaged closer to 1.49 percentage point, in response to Bloomberg index data.
Record inflows into fixed-rate annuities are also a sturdy driver of insurance demand for business mortgage-backed securities, Reardon wrote in a Feb. 6 note. AAA CMBS excess returns in 2024 are higher than those of every investment-grade and high-yield corporate debt, in response to Reardon.
The everyday AAA CMBS spread versus Treasuries stood at 0.88 percentage point as of Friday, having fallen roughly 30 basis points from an October high, data compiled by Bloomberg shows.
Over the next two years, annuity sales could total as much as $693 billion, in response to estimates from Limra. The group expects sales of as much as $331 billion this 12 months — a decline from 2023, but a level that should still have been a record in 2022.
“Last two years has been going gangbusters and the expectation is for this 12 months to be the similar,” said Dec Mullarkey, a managing director overseeing investment strategy and asset allocation at SLC Management, which manages $264 billion. Falling rates “will impact demand somewhat,” he cautioned, “but they’re going to still be at reasonable levels, that all-in yield will still be attractive versus history.”
Fixed-rate Deferred Annuities
One kind of annuity that’s selling particularly well are fixed-rate deferred annuities. Policyholders make an investment upfront, which accumulates interest at a tough and fast rate over a set time frame. After the so-called annuitization point, they’ll start receiving income payments.
The product line recently had its best-ever quarterly sales, with $58.5 billion sold throughout the fourth quarter, up 52% from the year-ago period, in response to Limra. Volume totaled $164.9 billion in 2023, up 46% from the 2022 annual high of $113 billion.
Annuities are inclined to be hottest amongst people nearing retirement or who’ve already left the workforce. The everyday age for those buying the products is around 62, in response to Bryan Hodgens, head of Limra research.
Roughly 17% of the US population was over 65 years old in 2022, compared with about 12% in 2000, data from the Federal Reserve Bank of St. Louis shows.
Any rate cuts by the Fed this 12 months would also buoy corporate debt as prices rise when yields fall.
“Credit has consistently outperformed other sectors of fixed income since mid-2020, and the surge in annuity sales is sort of actually an element of the rationale,” wrote Steven Abrahams, head of investment strategy at Santander US Capital Markets, in a note. “That might be a positive for credit performance going forward.”
(Updates Elsewhere in Credit box. A previous version of the story corrected the y-axis label throughout the second chart.)
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