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April 19, 2022 at 01:46 PM
What You Need to Know
- U.S. life insurers hold $4.3 trillion in corporate bonds and loans.
- An ICE BofA corporate bond spread indicator was 20% wider at the end of March than it was a year earlier.
- Rising oil and gas prices could give life insurers a small boost.
Global market gyrations and the Ukraine conflict are helping increase what U.S. life and annuity issuers earn on their bonds.
Life insurers depend heavily on “corporate bond spreads” — the gap between what they pay customers for money, and what they can earn by “lending,” or renting, money to corporations and home buyers.
One measure of corporate bond spreads, the ICE BofA BBB U.S. Corporate Index Option-Adjusted Spread, shows that yields on high-grade corporate bonds and notes were 1.49% higher on March 31 — at the end of the first quarter — than yields on the equivalent U.S. Treasury debt securities, according to data from the Federal Reserve Bank of St. Louis.
The corporate bond spread index was up 20% from the value recorded a year earlier.
Spreads are now about the same as, or higher than, the spreads recorded in most periods since mid-2018, outside of a five-month period in 2020 when COVID-19 was panicking the financial markets.
What It Means
For annuity and retirement specialists, widening spreads mean that the terms life and annuity issuers offer customers who buy products such as non-variable annuities, whole life, traditional universal life, long-term disability insurance and long-term care insurance could begin to stabilize, or even improve.
The impact of widening spreads could vary from company to company, with some hoping the widening will be long-lasting and others taking a wait-and-see approach. That could give financial professionals who know which companies are responding quickly an edge over financial professionals who are paying less attention to day-to-day changes in prices and benefits.
The Background
U.S. life insurers use huge investment portfolios to support their benefits obligations, and they put a large percentage of their assets in high-grade corporate bonds. They ended 2021 with $4.3 trillion in corporate bonds, according to Federal Reserve Board data.
A bond is a security that the issuer uses to borrow money.
