What You Need to Know
- Average yields on pretty good bonds have climbed over 3.4%, from below 3.2% earlier in the year.
- Defaults on the the kinds of bonds and loans life insurers hold have been low.
- Affluent baby boomers are still here, and still retiring.
U.S. individual annuity sales looked great in the second quarter, and analysts see reasons why the numbers could continue to look great for at least the next few quarters.
The third quarter of 2021 ended Sept. 30, and publicly traded insurers are getting ready to release their earnings, and their annuity sales totals, in the next few weeks.
COVID-19 is still here, interest rates are still low, and year-over-year comparisons will get tougher once the comparisons are with quarters when the economy started to recover, rather than with the grim second quarter of 2020.
But here are three reasons some analysts are cautiously optimistic.
1. Rates are looking a little better.
An annuity is really an investment burrito.
The life insurer’s contract serves as the flour tortilla.
The meat or protein is typically some combination of investment-grade corporate bonds, mortgage loans, mortgage-backed securities and derivatives, with private equity investments and other alternative assets playing the part of the cumin and the cilantro.
When yields on the assets inside the annuity burritos are low, insurers have a hard time earning enough on their own investments to pay annuity holders an attractive rate.
Rates fell to low, low levels in the wake of the COVID-19 pandemic and pandemic-related lockdowns but are now starting to come back up.
To balance investment safety concerns and a need for decent returns, life insurers tend to buy bonds that have investment-grade ratings — but just pretty good investment-grade ratings, not the very best ratings. One tracking index for bonds with pretty good ratings, the Moody’s Seasoned Baa Corporate Bond Yield index, shows that yields fell below 3.2% several times in the past year but have recently increased to more than 3.4%.
2. Borrowers are looking stronger.
Analysts once feared that pandemic-related disruption would lead to a huge wave of defaults.