Elevated interest rates attributed to success
Sales of annuities, a financial instrument aiding retirement funding, have surged to unprecedented heights, fueling demand for corporate debt and commercial mortgage bonds.
According to a Bloomberg report, sales of annuities in 2023 hit a historic high at $385 billion, marking a 23% surge from the previous year, as per data from the life insurance trade group LIMRA. This surge in popularity is attributed to the allure of higher potential annual payouts due to escalating interest rates.
Behind the scenes, life insurers, the primary vendors of annuities, are investing in bonds to generate revenue for these products, primarily targeting corporate debt and asset-backed securities, notably mortgage bonds. While the recent decline in bond yields might temper demand, LIMRA anticipates robust annuity sales, aligning with historical trends.
Strong yields seen amid elevated interest rates
Torsten Slok, chief economist at Apollo Global Management, emphasized the pivotal role of retail and pensions seeking higher yields and noted annuity sales are driven by more Baby Boomers retiring amid elevated interest rates.
According to Deutsche Bank AG strategist Ed Reardon, funds raised through annuities typically gravitate toward investment-grade debt, predominantly fixed-rate with durations spanning three to 10 years in line with annuity tenures.
Reardon noted AAA commercial mortgage-backed securities (CMBS) are also witnessing robust demand, with excess returns surpassing those of investment-grade and high-yield corporate debt.
Despite a slight decline anticipated this year, annuity sales could still surpass $693 billion over the next two years, with 2023 marking a record high of $331 billion, according to LIMRA estimates.
Bloomberg said fixed-rate deferred annuities, a popular annuity variant, have recently experienced an exceptional surge in sales. Policyholders invest upfront, accruing interest at a fixed rate until the annuitization point, when they start receiving income payments.
Sales of fixed-rate deferred annuities soared to $58.5 billion in the fourth quarter, a 52% increase from the previous year, setting a new quarterly record. The growing popularity of annuities is particularly pronounced among individuals nearing retirement or already retired, with the average buyer age hovering around 62.
Have something to say about this story? Leave a comment below.
