A significant shift in investment strategies is changing the insurance landscape, driven by a surge in annuity sales. According to a recent report by Bloomberg, this trend is reshaping how insurance companies approach their investments, particularly as demand for shorter-duration, less liquid assets rises.
The research organization LIMRA revealed in an October report that sales of fixed-rate deferred annuities have skyrocketed. In just two years, sales have more than tripled, reaching $164.9 billion in 2023, up from over $50 billion in both 2020 and 2021. This increase is largely due to retirees seeking steady income and higher interest rates that traditional insurance products often fail to provide.
Geoff Cornell, the chief investment officer at AllianceBernstein’s insurance unit, explained that a combination of factors has influenced these changes. He noted that rising interest rates and an increasing number of retirees have led to a significant uptick in annuity sales. Since annuities are typically shorter-term products compared to traditional life insurance policies, insurers are now looking to invest in shorter-term assets.
This shift is broadening the investment options for insurers. Cornell mentioned that insurers are now considering private credit, private placements, asset-based lending, and middle-market direct loans. These sectors generally offer higher yields than longer-term investments.
Gary Zhu, deputy chief investment officer at AllianceBernstein, referred to this change as part of an “insurance renaissance.” He pointed out that demographic shifts and the expansion of private credit are prompting insurers to rethink their traditional investment strategies. Zhu highlighted that insurers are now not only interested in higher-yielding private assets but are also looking into equity investments.
Despite expectations that annuity sales might slow down, especially if interest rates fall, Cornell believes that the demand for predictable income among retirees will persist. Last year alone, more than $400 billion in annuities were sold, indicating a strong market.
Additionally, property and casualty insurers, who also focus on shorter-duration products, may increasingly explore investment opportunities in securitized and private alternatives. Zhu noted a growing interest among insurers in esoteric asset-backed securities (ABS), with recent trends shifting from traditional investments to sectors like oil and gas transactions and royalty deals.
As the insurance industry adapts to these changes, it seems poised for continued evolution, with new investment opportunities emerging to meet the demands of a changing demographic landscape.