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Most Life and Annuity Issuers Have Good Stormproofing: Moody's Analysts

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Most U.S. life and annuity issuers still look strong — but one headache they face is the possibility that the failure of a long-term care insurance (LTCI) issuer could conk them on the head.

Michael Fruchter, a vice president in the financial institutions group at Moody’s Investors Service Inc., and other Moody’s analysts take a new look at life and annuity issuer risk in a report on issuers’ vulnerability to “an adverse scenario.”


Rating agencies put out reports of that kind regularly. About a year ago, they started to analyze how vulnerable life and annuity issuers might be to the COVID-19 pandemic.

The analysts at Moody’s and other agencies predicted, correctly, that the kinds of large U.S. life insurers they rate were well-prepared for the possibility that COVID-19 could lead to a spark in life insurance claims, but that low interest rates could be hard on annuity earnings.

The new Moody’s report provides a similar kind of analysis, enriched with information about how life and annuity issuers have already performed in the face of COVID-19 deaths, pandemic-related social distancing rules, and low interest rates.

The analysts predict that, even in a severe scenario, extra death benefit payments would cause a temporary drop in earnings but less than a 10% hit to capital.

Here are three other new things Moody’s analysts are saying about the issuers’ stormproofing.

1. The gap between “book yield” and the “tabular interest rate” is something to watch.

Life insurers use huge investments in high-rated bonds, mortgages and mortgage-backed securities to support their long-term life and annuity benefits guarantee obligations.

The Federal Reserve Board and other central banking agencies around the world have made moves to hold down interest rates, in an effort to help homeowners and other borrowers with variable-rate debt stay afloat, and to try to keep the stock market humming along.

Efforts to keep rates low to help borrowers can eventually hurt life insurers, which usually act as lenders rather than as borrowers.

Low interest rates won’t hurt most life insurers’ capitalization levels immediately, but they will affect insurers’ capital levels over time, the analysts write in the new report.

The analysts say one indicator of “spread compression,” or the narrowing of the difference between what life insurers have promised to pay customers and what they can earn on their own investments, is the gap between “book yields” and “tabular interest rates.”

The Moody’s analysts used life insurers’ reported earnings on bonds and mortgages as an indicator for “book yield,” or the average earnings on the insurers’ investment portfolios.

A life insurer’s “tabular interest rate” is the average interest rate the company is paying on policyholder liabilities.

A typical large life insurer has a book yield of about 4% to 5%, and typical tabular interest levels range from about 4% to a little more than 5%, according to the Moody’s analysts’ examination of data from SNL Financial LLC.

2. If rates stay very low, variable annuity blocks could suffer.

Rates have been increasing in recent weeks, and a moderately rapid increase in rates could make variable annuity blocks very profitable.

But, if rates stay low and fee revenue falls sharply, loss of variable annuity fee revenue could cause some pressure, the analysts say.

3. If long-term care insurance does very poorly, an LTCI issuer’s problems could become other insurers’ problem.

The Moody’s analysts provide a table showing what might happen to about 50 U.S. life and annuity issuers’ risk-based capital (RBC) levels, or official soundness levels, after an adverse scenario.

The analysts found that most of the companies would still have at least 2.5 times as much capital as the minimum required amount.

But the analysts have found that a company with a large amount of long-term care insurance on its books could end up with capital below the required minimum.

If one large insurer became insolvent, that could lead to an extra hit for other insurers, because state guaranty funds require the surviving insurers in a state to try to help make good on some of a failed issuers’ policies, by paying assessments into a guaranty fund.

Guaranty funds often have complicated rules governing which insurers must pay assessments, and they typically limit how much any given surviving insurer has to pay in assessments in any given year.

— Read Humana Breakup, Penn Treaty Charge Hit Aetna Earningson ThinkAdvisor.

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© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.