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Life Health > Annuities > Fixed Annuities

Moody's Scopes Out the Hot Summer Life and Annuity Fashions

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What You Need to Know

  • In: Individual and employer-sponsored retirement arrangements of all kinds.
  • In: Fixed income annuities, guaranteed universal life policies and whole life policies.
  • Out: Having an easy time controlling administrative expenses.

Soft spring economic sunlight made many life insurance and annuity products look beautiful — but too much summer heat could hurt.

Laura Bazer and other analysts at Moody’s Investors Service assessed sales and financial trends in the U.S. life, health and annuity sector Thursday, in a new sector review.

Although a future combination of high inflation and a recession or a big, sudden, 3-percentage-point spike in long-term bond yields could burn some life insurers to a crisp, the current combination of modest rate increases and wage inflation is buoying sales growth, the analysts write.

What It Means

Life insurers are offering your clients more attractive life and annuity deals, and many clients are responding to those offers.

You need to track life insurers’ financial strength closely to understand how economic risk is affecting the value of the benefits guarantees embedded in the life and annuity products that clients are adding to their portfolios.

Moody’s

Moody’s is not just any old company with an opinion. It’s one of the world’s major bond and insurance rating organizations.

Its views affect whether companies and other organizations can borrow money, whether insurers have the financial strength to offer insurance, what interest rates borrowers pay to borrow money, and how much insurers can charge for products such as fixed annuities.

The Commentary

The new report does not affect the ratings Moody’s has provided for any life insurer, but it reflects how the firm sees U.S. issuers’ operating environment.

The analysts note that the life insurers have about 70% of their assets in bonds.

“Life insurers all benefit [as] interest rates rise, both immediately, as they invest new premiums in higher-yielding securities, and incrementally over time, as existing investments mature and are reinvested at higher prevailing interest rates,” the analysts write.

Here are some of the products benefiting from the higher rates:

  • Specialty health products, such as long-term care insurance and the annuities used to fund the structured settlements associated with lawsuit damage awards.
  • Interest-sensitive individual life insurance products, such as whole life and guaranteed universal life insurance.
  • The most interest-sensitive annuities, such as immediate annuities and the group annuities used in pension risk transfer arrangements.

Moody’s analysts see rising wages increasing deposit levels for all kinds of retirement savings arrangements, including 401(k) plans 403(b) plans, 457 plans, ordinary mutual funds and IRAs.

Clouds

The analysts warn that rising wages can increase life insurers’ own administrative costs, and that rising wages may increase claim costs for some types of health policies, such as some long-term care insurance policies that pay higher levels of benefits when the cost of care rises.

The analysts also warn that either a 3-percentage-point spike in long-term bond yields or a persistent period of low economic growth and inflation could weaken life insurers.

A big, rapid rate rise could shift assets out of life and annuity products and into bonds, and that could hurt life insurers’ capital levels and ability to come up with cash quickly, the analysts say.

A combination of inflation and an economic slump, or “stagflation,” could increase insurers’ overall risk levels by hurting their sales, revenue and earnings, the analysts add.

(Image: Adobe Stock)