(Bloomberg) — An insurance coverage product that customers use to assist fund their retirements is promoting at file ranges, powering demand for company debt and business mortgage bonds.
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Final 12 months, gross sales of annuities, which permit shoppers to successfully purchase revenue for the remainder of their lives, reached an all-time file excessive of $385 billion, in accordance with life insurance coverage commerce group Limra. That’s up 23% from the 12 months earlier than. The merchandise grew extra engaging as rising rates of interest translate into greater potential annual payouts from the merchandise.
Behind the scenes, the life insurers that often promote annuities are shopping for bonds to generate revenue for the merchandise, and particularly, company debt and asset-backed securities together with mortgage bonds. Their demand would possibly decline a bit this 12 months after bond yields have fallen, however Limra says annuity gross sales are nonetheless anticipated to stay robust by historic requirements.
The insurers’ bond purchases underscore how demand for a lot of debt securities now could be pushed by demographics, and illustrates why valuations for company bonds can stay excessive even because the Federal Reserve retains financial coverage comparatively tight.
“Key drivers for credit score demand in the intervening time are retail and pensions in search of greater all-in yields, and annuity gross sales pushed by extra child boomers retiring and by the next degree of rates of interest giving policyholders greater month-to-month funds,” mentioned Torsten Slok, chief economist at Apollo World Administration.
Cash raised by annuities usually goes towards investment-grade debt, often fixed-rate and ranging between three to 10 years — broadly consistent with annuity durations, mentioned Deutsche Financial institution AG strategist Ed Reardon.
For investment-grade company bonds, demand from annuities and different traders catering to retirees are serving to to maintain valuations excessive. The typical threat premium, or unfold, on an organization observe rated BBB- or greater is 0.95 proportion level, near the tightest degree within the final two years.
During the last twenty years, spreads have averaged nearer to 1.49 proportion level, in accordance with Bloomberg index information.
Document inflows into fixed-rate annuities are additionally a robust driver of insurance coverage demand for business mortgage-backed securities, Reardon wrote in a Feb. 6 observe. AAA CMBS extra returns in 2024 are greater than these of each investment-grade and high-yield company debt, in accordance with Reardon.
The typical AAA CMBS unfold versus Treasuries stood at 0.88 proportion level as of Friday, having fallen roughly 30 foundation factors from an October excessive, information compiled by Bloomberg exhibits.
Over the subsequent two years, annuity gross sales may complete as a lot as $693 billion, in accordance with estimates from Limra. The group expects gross sales of as much as $331 billion this 12 months — a decline from 2023, however a degree that might nonetheless have been a file in 2022.
“Final two years has been going gangbusters and the expectation is for this 12 months to be the identical,” mentioned Dec Mullarkey, a managing director overseeing funding technique and asset allocation at SLC Administration, which manages $264 billion. Falling charges “will affect demand considerably,” he cautioned, “however they may nonetheless be at cheap ranges, that all-in yield will nonetheless be engaging versus historical past.”
Fastened-rate Deferred Annuities
One sort of annuity that’s promoting significantly effectively are fixed-rate deferred annuities. Policyholders make an funding upfront, which accumulates curiosity at a hard and fast fee over a set period of time. After the so-called annuitization level, they will begin receiving revenue funds.
The product line lately had its best-ever quarterly gross sales, with $58.5 billion offered within the fourth quarter, up 52% from the year-ago interval, in accordance with Limra. Quantity totaled $164.9 billion in 2023, up 46% from the 2022 annual excessive of $113 billion.
Annuities are usually hottest amongst folks nearing retirement or who’ve already left the workforce. The typical age for these shopping for the merchandise is round 62, in accordance with Bryan Hodgens, head of Limra analysis.
Roughly 17% of the US inhabitants was over 65 years previous in 2022, in contrast with about 12% in 2000, information from the Federal Reserve Financial institution of St. Louis exhibits.
Any fee cuts by the Fed this 12 months would additionally buoy company debt as costs rise when yields fall.
“Credit score has persistently outperformed different sectors of fastened revenue since mid-2020, and the surge in annuity gross sales is nearly actually a part of the rationale,” wrote Steven Abrahams, head of funding technique at Santander US Capital Markets, in a observe. “That could be a optimistic for credit score efficiency going ahead.”
(Updates Elsewhere in Credit score field. A earlier model of the story corrected the y-axis label within the second chart.)
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