When researching some stocks to buy this week, I came across an interesting piece from earlier in February about annuity demand. According to Axios, annuity sales climbed 22% higher in 2022 to about $310 billion. LIMRA also projects that fixed indexed annuity (FIA) sales will experience “moderate increases” over the next three years through 2025.
The combination of higher interest rates and poorly performing stock markets made them irresistible to investors, especially those at or near retirement.
Annuities are set up so that, in exchange for your lump sum payment or agreed-upon series of payments, the insurance company that sold you the annuity agrees to provide you with a stream of income for life or an established period of years.
I don’t want you to think I’m providing financial advice, because I’m not. However, it seems annuity sales are expected to do well for the next few years. So, it stands to reason that the companies that sell them should benefit from this trend.
Based on that assumption, here are three stocks to buy to make money from a growing annuities market.
Stocks to Buy: Berkshire Hathaway (BRK-B)
It makes sense that Berkshire Hathaway (NYSE:BRK-B, NYSE:BRK-A) — one of the United States’ largest public companies — is also one of its biggest insurance businesses. According to Investopedia, using numbers from March 2022, Warren Buffett’s holding company is the largest publicly traded insurance company by market capitalization. It also rates highly in terms of net premiums written.
The unknown here is its annuity business.
According to Berkshire’s 2021 annual report, the insurance businesses employed 50,500 people at the end of 2021. According to other data, Berkshire is also the eighth-largest U.S. employer with more than 370,000 employees. If we use the 50,500 figure for its insurance businesses, it ties for 141st place.
That’s pretty darn good.
The 2021 annual report mentions “annuity” 30 times over 143 pages. For example, page K-37 suggests that Berkshire Hathaway Reinsurance Group wrote periodic payment annuity premiums of $658 million in 2021. That generated a pre-tax underwriting loss of $508 million. The group also wrote a small amount ($15 million) of variable annuity premiums in 2021. A loss for this kind of annuity contract is normal.
However, according to a MarketWatch article from 2013, Buffett liked the risk/reward proposition related to reinsuring “run off” variable annuity business.
Essentially, Buffett was lending money to insurance companies so that they had enough reserves to cover the contractual guarantees of these variable annuities. Like many of Berkshire’s preferred share deals to struggling financial services businesses in 2008, the company was richly rewarded for these reinsurance contracts.
Annuities aren’t a big piece of Berkshire’s business, but it’s another reason to own BRK-B stock.
American Equity Investment Life Holding (AEL)
Suppose you bought shares of American Equity Investment Life Holding (NYSE:AEL) stock as part of the December 2003 initial public offering (IPO) at $9 and are still holding. As a result, you’d be sitting on a compound annual growth rate of around 8%, marginally better than the 6.85% of the S&P 500 over the same period.
That’s not a significant difference, I’ll grant you. But this Iowa-based insurance company also restarted its share repurchase program in early 2022. That has added significantly to the stock’s total yield, which is calculated by combining a company’s dividend yield and its buyback yield.
Through the first nine months of 2022, American Equity repurchased 13.6 million shares at an average price of $34.63, for a total outlay of $471 million. CEO Anant Bhalla wrote in a 2022 shareholder letter that the company intends to be an “active buyer” of its common stock.
Bhalla will have been CEO for three years come March 1. He’s in the middle of a multi-year transformation of the company. AEL is moving from selling fixed index annuities in the U.S. to becoming a more global, fee-oriented insurance company.
As part of this, AEL is building a more profitable investment portfolio with 40% of assets allocated to private capital investments. So, in addition to generating more fee income globally, AEL has become more focused on its asset management. That’s from Warren Buffett’s playbook, for sure.
Equally important, Brookfield Reinsurance (NYSE:BNRE) now owns 16% of the company after buying 6.78 million shares of AEL stock in early 2022. As of Sept. 30, 2022, Brookfield had $41.4 billion in total assets.
It’s going to take another 12 to 18 months for the company’s transition to deliver for shareholders. But with Brookfield on board, it will be worth the wait.
Stocks to Buy: Apollo Global Management (APO)
This last pick of the stocks to buy is less of a side-door play on annuities than you might think. Although Apollo Global Management (NYSE:APO) may be one of the world’s leading alternative asset managers with private equity, credit and infrastructure platforms, it’s also a big provider of retirement solutions. That includes a large amount of annuities through Athene, a company it acquired in early 2022 in an $11 billion all-stock deal.
In the months since the merger, APO stock has moved relatively sideways.
According to Apollo’s fourth quarter 2022 conference call transcript, Athene had $48 billion of organic inflows last year, making it the top U.S. provider of annuities. And Athene does so in a very profitable manner.
Apollo CEO Marc Rowan said the following in the Q4 conference call:
“By some measure, there are now north of 100 asset management entities or insurance entities who have become asset managers pursuing a strategy similar to that which Athene started on 13 years ago.”
Last June, Athene also announced that it had agreed to assume $4.3 billion of Lockheed Martin’s (NYSE:LMT) pension obligations. It has assumed over $10 billion of the aerospace company’s pension obligations since 2018. Athene Reinsurance Co-investment has entered into 35 transactions with plan sponsors “covering over $32.2 billion in premiums for more than 390,000 annuitants since entering the market.”
This, too, is a page out of the Warren Buffett handbook, although there is the risk that the reinvestment of the premiums will deliver inferior returns based on this risk.
Per Barron’s, Athene provides more than half of Apollo’s profits. Eventually, investors will be willing to pay more for this underappreciated asset.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.