CLOs to Remain Popular With U.S. Annuity Providers Despite Controversy Over Potential Changes to Capital Requirements

DBRS Morningstar published a commentary discussing U.S. annuity providers’ investments in collateralized loan obligations (CLOs) and potential changes to the capital requirements associated with CLO holdings.

Key highlights:

-- Higher interest rates have breathed new life into the U.S. annuity market, which is experiencing record sales.

-- Many annuity providers are now controlled or associated with private equity firms, which have a strong investment appetite for CLOs, serving to back their annuity portfolios.

-- While there is controversy within the industry on the appropriate capital charges associated with CLO investments, we expect the asset class, and especially its higher rated tranches, to remain attractive for annuity providers.

“Despite weaker investor sentiment and looming recession concerns, U.S. life insurers reported a record $92.9 billion in annuity sales in Q1 2023,” said Patrick Douville, Vice President, Insurance. “The proportion of collateralized loan obligations on the balance sheet of U.S. life insurers has increased in recent years, especially for annuity providers that are associated with private equity firms… Although we expect U.S. credit conditions to generally worsen because of tight monetary policy, CLO performance has remained resilient so far, earning strong risk-adjusted returns for many annuity providers.”