A shift in investment strategies is reshaping the insurance industry as rising annuity sales drive demand for shorter-duration, less liquid assets, Bloomberg reported, citing AllianceBernstein.
In an October report from LIMRA, the research organization said that fixed-rate deferred annuities have more than tripled in the last two years, rising to $164.9 billion in 2023, up from just over $50 billion in both 2020 and 2021. This increase was driven by demand in steady, worry-free income and higher interest rates that traditional insurance products do not necessarily satisfy.
Geoff Cornell, chief investment officer of AllianceBernstein’s insurance unit, said a combination of factors has altered how insurers invest in recent years.
“First, rising interest rates and a greater share of retirees have driven a huge increase in sales of annuities,” Cornell said. “And since annuities are relatively short products compared to traditional life insurance policies, this creates a need for insurers to park money in shorter assets.”
What this did, according to Cornell, is = it broadened investment options to include private credit, private placements, asset-based lending and middle-market direct loans – sectors that tend to yield more than longer-duration assets.
Gary Zhu, deputy chief investment officer of AllianceBernstein, described the shift as part of an “insurance renaissance” where demographic changes and private credit expansion are reshaping traditional investment approaches.
“Traditionally, investing assets on behalf of insurance companies was a relatively straightforward matter of matching assets and liabilities. Now, not only are insurers looking to invest in higher-yielding private asset assets, it also makes sense for them to invest more in equity or equity-like structures,” Zhu said, pointing to a recent investment in a “sidecar” by Reinsurance Group of America as an example of how insurers are diversifying across the balance sheet.
Although annuity sales are expected to slow, particularly if interest rates decline, Cornell said he does not foresee a return to traditional long-duration investments. He noted that more than $400 billion in annuities were sold last year and ongoing demographic trends suggest continued demand for predictable income among retirees.
Additionally, property and casualty insurers, who also operate in shorter-duration markets, may increasingly seek investment opportunities in securitized and private alternatives, creating further demand for these assets.
Zhu also highlighted a growing appetite among insurers for esoteric asset-backed securities (ABS). While past investments in this category were largely tied to whole-business securitizations from fast-food chains, demand has shifted toward oil and gas transactions and royalty deals.
“We think this market will continue to evolve with newer collateral types emerging as insurers look for spread premium on complex structures and the illiquidity premium,” Zhu said.
