Experts Weigh In on Asset-Backed Securities in the Insurance Sector
A shift is reshaping the insurance industry’s investment approach, driven by the surge in annuity sales. This surge is creating a strong demand for assets that offer shorter durations and less liquidity, according to a recent report from Bloomberg, which cited insights from AllianceBernstein.
Data from LIMRA’s October report revealed that fixed-rate deferred annuities have more than tripled in the last two years. These annuities climbed to $164.9 billion in 2023, a substantial increase from just over $50 billion in both 2020 and 2021. The increase in sales is linked to individuals seeking steady, reliable income, along with the advantage of higher interest rates that traditional insurance products may not offer.
Geoff Cornell, the Chief Investment Officer of AllianceBernstein’s insurance unit, explained how a combination of factors has reshaped the way insurers invest. “First, rising interest rates and a greater share of retirees have driven a huge increase in sales of annuities,” Cornell stated. “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.”
This shift, according to Cornell, has broadened investment options to include private credit, private placements, asset-based lending, and middle-market direct loans. These sectors generally offer higher yields compared to longer-duration assets.
Gary Zhu, Deputy Chief Investment Officer at AllianceBernstein, described this change as part of an “insurance renaissance.” He highlighted how demographic shifts and the expansion of private credit are altering conventional investment strategies. Zhu said, “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,” pointing to a “sidecar” investment by Reinsurance Group of America as an example of the industry’s diversification.
While the growth of annuity sales is predicted to slow down, particularly if interest rates fall, Cornell does not anticipate a return to long-duration investments. He noted that annuity sales last year exceeded $400 billion. Ongoing demographic trends suggest a continuous demand for steady income among those preparing for retirement. Moreover, property and casualty insurers, who also operate in shorter-duration markets, are likely to seek investment prospects among securitized and private alternatives, which will further fuel the demand for these assets.
Zhu also pointed out the increasing interest among insurers in esoteric asset-backed securities (ABS). Although past investments in this category were primarily focused on whole-business securitizations from fast-food chains, the demand has shifted to energy transactions and royalty agreements. Zhu added, “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.”
