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Annuity Issuers Move to Fill Bank Loan Gap

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U.S. annuity sales should be strong in 2024, and the issuers will probably invest a significant share of the premiums in private credit arrangements, according to Jamie Tucker, a senior director at Fitch Ratings.

“We expect allocation to private credit to continue to increase, in part driven by bank lending retrenchment,” Tucker said Friday during a Fitch briefing on its credit outlook for the North American life sector.

What it means: More of the assets inside clients’ annuities may be tied to pools of car loans, credit card accounts and small-business loans, and less to the notes and bonds that provide financing for big, well-known companies, partly because banks are facing turbulence.

Private credit: The private credit market handles financing provided through mechanisms other than bank loans and publicly traded bonds.

The size of the U.S. private credit credit market increased to $2.3 trillion at the beginning of 2023, from $875 billion in 2020, according to Morgan Stanley.

State insurance capital counting rules strongly encourage U.S.-based life and annuity issuers to invest in high-grade corporate bonds, but plummeting bond yields pushed insurers to bump up allocations to other assets after the 2007-2009 Great Recession.

Private equity firms have acquired some life and annuity issuers and connected with others through large reinsurance arrangements. These firms have promoted increased insurer use of private credit and other assets that pay relatively high rates because they are more difficult to sell than publicly traded stocks or publicly traded bonds.

In recent years, the Federal Reserve Board and other bank regulators have imposed tougher minimum capital rules on banks. Analysts say the new capital requirements have reduced banks’  lending activity and caused other types of companies, including life and annuity issuers, to fill in the credit supply gap.

“Fitch expects life insurers to continue to shift portfolios to private asset classes to capture the illiquidity premiums,” according to a Fitch outlook report.

But higher rates on investment-grade bonds “decreases the likelihood that life insurers will overreach for yield in ways that increase vulnerability to a large market shock,” the firm says.

The environment: Overall, the outlook for North American life and annuity issuers looks good, Tucker said.

The economy may avoid entering a recession, insurers’ balance sheets are strong, and the insurers that Fitch rates have large capital buffers that should protect them against problems with the office market, he said.

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