Annuity issuers are investing more of their portfolios in securitized assets, such as residential mortgage-backed securities and commercial mortgage-backed securities, and that should help them earn more money.
A team of Morgan Stanley analysts led by Bob Jian Huang has given that assessment in a new commentary on investment trends at North American life and annuity issuers.
Traditionally, because of tax rules, other regulatory constraints and rating agency preferences, U.S. life and annuity issuers put a large majority of their trillions of dollars in reserves in investment-grade corporate bonds.
Many of the observers who weigh in on life and annuity issuers' investments tend to be state insurance regulators or insurance strength rating analysts, who are trying to determine whether an insurer will be able to make good on its obligations on its worst day ever.
Typical securities analysts are looking for companies that are likely to do well this year, in what seems to be a pretty good economy, and they would prefer to see life and annuity issuers create portfolios that will do great in the current environment.
The Morgan Stanley analysts make the case that getting higher risk-adjusted returns from securitized assets will "improve the overall annuity ecosystem."
Securitized assets made up 25% of insurers' bond portfolios in 2023, up from 22% in 2017.
The dollar value of the securitized assets increased to $1.3 trillion.
"While there are a number of factors contributing to this trend, we think a few of the key drivers should allow for it to continue in the years to come," the analysts write.
One factor is a change in philosophy that occurred in the 2010s, when very low interest rates forced annuity issuers to use new strategies to increase their yields, and another factor is a shift in capital counting rules at the National Association of Insurance Commissioners, the analysts say.
"From the perspective of insurance companies, securitized products opportunities are not yet fully realized," the analysts add.
The analysts predict that Corebridge and Equitable will benefit the most from increased use of securitized assets.
Equitable should also profit from its leading position in the hot registered index-linked annuity market, and Corebridge should benefit from the introduction of its new RILA product, the analysts say.
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