Life and annuity issuers will lurch to the end of the second
quarter Thursday, and then get ready to tell investors what the heck just
happened.
The companies that promise to protect your clients against
death, disability, long-term care risk and longevity risk faced a storm of
lemons. While some insurers were able to make lemonade from those lemons, they
may have conked other insurers hard on the head.
The National Association of Insurance Commissioners Capital
Markets Bureau has tried to make sense of some of the new, market-shaping
factors, and companies like Fitch Ratings have tried to analyze others.
Here’s a look at five of those factors, and what kinds of
insurers might benefit from and suffer from those factors.
1. Rising Interest Rates
Interest rates have now been at low, low levels for years.
The Federal Reserve Board began to turn away from “lower,
forever and ever and ever, and ever” in March, and do what it could to nudge
rates higher.
Rising rates could hurt any life and annuity issuers that
need to borrow money to support their operations, or that depend heavily on the
value of investments in stock or residential real estate.
But steadily rising rates should be lemonade for any life
and annuity issuers with ordinary, plain-vanilla portfolios of high-grade
corporate bonds.
2. Fear, Uncertainty & Wider Spreads
Russia invaded Ukraine on Feb. 24, and the shock and unease
created by the war continued after March 31, into the second quarter.
In happier times, investment-grade corporate borrowers paid
rates close to what the U.S. Treasury paid.
Since Feb. 24, the spreads between what investment-grade
corporate borrowers and the U.S. federal agencies pay to borrow money widened.
The wider spreads could hurt any life insurers that are
heavy borrowers themselves, or that have unusually close relationships with
shakier companies.
But wider spreads probably helped most life and annuity
issuers with ordinary, bond-filled investment portfolios.
3. COVID-19 Mortality Rate
The COVID-19 spike that hit in January passed quickly. But
the new, lower COVID-19 death rate still averaged more than 300 per day.
The pandemic continued to kill about as many people on a
typical day as diabetes.
The ongoing COVID-19 mortality drag could be a “headwind”
for life and annuity issuers that have sold large amounts of mortality-focused
life insurance, but it could be lemonade for issuers with large amounts of
pension risk transfer business, income annuities, long-term disability
insurance claims or long-term care insurance policies on their books.
4. Long Duration Targeted Improvements
The Financial Accounting Standards Board is about to put
U.S. life insurers on its new “Long Duration Targeted Improvements”
rollercoaster ride, starting Jan. 1, 2023.
The new accounting standard will make life insurers’
earnings and shareholders’ equity figures more volatile by requiring the
insurers to put changes in insurance liability exposure, valued using a
discount interest rate tied to current market interest rates, in their
quarterly results.
Fitch Ratings is predicting that the long-feared arrival of
the LDTI rules will have little effect on ratings at most life insurers it
rates.
“Fitch’s expected analytical approach for LDTI will be to
reverse all or a portion of the impact of the new market discount rate as
related reserve changes flows through the accumulated other comprehensive
income … component of shareholders’ equity,” Fitch said in a discussion of the
coming change. “This reversal reflects Fitch’s belief that LDTI will not affect
the underlying cash flows or economics of affected liabilities.”
But LDTI could be ratings lemonade for a life insurer if the
new approach “reveals a material weakness or risks previously not incorporated
into Fitch’s ratings analysis, which may exist where asset-liability management
is less stringent than currently assumed,” Fitch warned. “LDTI could also
impact ratings if it causes management to implement changes Fitch views as
adverse to an insurer’s business or financial profile.”
5. The Great Resignation
Life and annuity issuers, their employer customers and their
retail clients are all facing major shifts in who works where.
The human resources realignment could help insurers and
advisors make lemonade by converting people who have been passive employer plan
participants into active users of individual products and services.
But issuers could also face upheaval in enrollment in their
benefit plan arms, and some could face problems with retaining their own highly
skilled, difficult-to-replace talent.
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