A $700 billion insurance product fuels the rise of the US credit market

A 0 billion insurance product fuels the rise of the US credit market

Sales of an insurance product that customers use to help finance their retirement expenses rose at record levels, boosting demand for corporate debt and commercial mortgage bonds.

According to “Economy of the East with Bloomberg,” sales of annuities – which allow customers to effectively purchase income for the rest of their lives – rose to a record level of $385 billion during the past year, according to the “Limra” life insurance commercial group. This represents an increase of 23% compared to the previous year. These products are becoming more attractive, as higher interest rates mean potentially higher annual payments.

Behind the scenes, life insurance companies that typically sell annuity products buy bonds to generate income, particularly corporate debt and asset-backed securities including mortgage bonds. Demand may decline slightly this year after bond yields fall, but Limra expects sales of pension products to remain strong by historical standards.


Insurers’ bond purchases underscore the extent to which demographics are currently driving demand for many debt securities, and show why corporate bond valuations are likely to remain high even as the US Federal Reserve keeps monetary policy somewhat tight.

“The primary drivers of credit demand currently are individual investors and pensions seeking higher yields, pension sales driven by the retirement of more baby boomers and rising interest rates providing savings to holders,” said Torsten Slok, chief economist at Apollo Global Management. Insurance policies have higher monthly payments.”

Ed Reardon, a Deutsche Bank strategist, said that the money raised by pension products often goes into investment-grade debt, usually with a fixed interest rate and a maturity of three to 10 years, which generally coincides with the payment periods of pension payments. .

On the investment-grade corporate bond front, demand from pensions and other investors serving retirees is helping valuations remain high. The average risk premium, or yield spread, on corporate bonds rated BBB- or higher is 0.95 percentage points, near the lowest level over the past two years.

Over the past two decades, average yield spreads have been close to 1.49 percentage points, according to Bloomberg index data.

Insurance companies

Record investments in fixed-rate annuities also represent a strong driver of insurer demand for commercial mortgage-backed securities, Reardon wrote in a note to clients dated February 6. According to Reardon, the incremental returns on AAA-rated commercial mortgage-backed securities through 2024 exceed the returns on both investment-grade and high-yield corporate debt.

Data compiled by Bloomberg revealed that the average yield spread for commercial mortgage-backed securities rated (AAA) versus Treasury bonds reached 0.88 percentage points as of last Friday, after falling approximately 30 basis points compared to its highest level recorded last October.

Over the next two years, sales of pension products could reach $693 billion, Limra estimates. The group expects sales to reach $331 billion this year, lower than in 2023, but a level that would have remained a record had it been achieved in 2022.

“The past two years witnessed strong activity, and this year is expected to achieve the same performance,” said Dick Mullarkey, general manager who oversees investment strategy and asset allocation at SLC Management, which manages assets worth $264 billion. He warned that falling returns “will affect demand somewhat, but they will continue at acceptable levels, and the total return will remain attractive compared to historical levels.”

Deferred fixed-return annuities

Among the types of annuities that sell particularly well are deferred fixed-income annuities. Policyholders invest by putting money up front to earn interest at a fixed rate over a specified period of time. After the so-called pension activation point, they can start receiving income payments.

This type of product recently achieved its best quarterly sales in its history, with $58.5 billion sold in the last quarter of last year, an increase of 52% over the period of last year, according to Limra. The total volume reached $164.9 billion during 2023, rising 46% from the highest annual level during 2022 at $113 billion.

Pensions are usually more popular among people who are approaching retirement age or who have already left the labor force. The average age of those who buy the products is about 62 years old, according to Brian Hudgens, head of Limra’s research unit.

Data from the US Federal Reserve Bank in St. Louis revealed that about 17% of the population of the United States of America will be over 65 years of age during 2022, compared to about 12% during 2000.

interest rates

Any interest rate cuts by the US Federal Reserve this year will also boost corporate debt as rates rise when yields fall.

“The credit market has consistently outperformed other sectors of fixed income investments since mid-2020, and increased sales of annuity products are almost certainly part of the reason,” Stephen Abrahams, head of investment strategy at Standard U.S. Capital Markets, wrote in a note to clients. This is positive for the future performance of the credit market.”


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