Many different types of companies and organizations sell annuities in the United States, although only insurance companies (typically life insurance companies) are able to issue annuities. Even when a bank sells an annuity to a customer, the bank must be working with a licensed life insurance agent who is writing/issuing the policy on behalf of a life insurance company. When you are exploring which company you want to purchase an annuity from, you may begin wondering where the insurance companies invest the money that you put into your annuity. After all, insurance companies – even non-profit organizations that offer annuity products – need to invest your money in a profitable place so that they are able to gain interest on the money and, in turn, offer you a reasonable rate of return on your annuity.
Just as there are many different places from which you can purchase an annuity, there also are many different places that those insurance companies choose to invest your money. In 2011, the National Association of Insurance Commissioners produced a special report that analyzed the investment portfolio asset mixes of the insurance industry. As a whole, across all types of insurance companies (life and health plus property and casualty) it was identified that nearly 70% of insurance company assets are invested in bonds. After that, the next highest percentage was common stock at 10.3%, followed by a variety of smaller asset types including mortgages, real estate, cash, and other receivables.
For life insurers specifically, about 44% of invested assets were placed into corporate bonds. Across the entire life insurance industry, this amount in corporate bonds surpassed $1.3 trillion! Life insurance companies also heavily invested in structured securities, United States Government bonds, and commercial mortgage loans.
A review by the Chicago Federal Reserve in 2013 showed that the life insurance industry’s assets skewed even more towards bonds than the National Association of Insurance Commissioners found two years earlier. In fact, the Chicago Fed found that 75.5% of life insurance assets were invested in bonds, with 46% of that being in corporate bonds. These numbers were further broken down by the industries that life insurers invested in most often. The largest percentage was manufacturing companies, followed very closely by finance companies and rounded off by foreign (non-US) companies. Other industries with smaller percentages (less than 10%) included mining and oil, media and communications, service and leisure, and retail.
Insurance companies choose to invest in bonds for the same reason that individual investors choose to put a portion of their money into bonds: in most economic situations, bonds are a stable investment. Bonds typically do not offer interest rates as high as stocks when the economy is doing very well, but on the other hand, the interest rates of bonds do not drop as significantly as stocks when the economy is doing very poorly. Since both annuities and regular life insurance policies are purchased for the long-term, these insurance companies can afford to take the safe approach of putting most of their assets in bonds, and earning a lower amount of interest.