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Life Health > Annuities > Variable Annuities

5 Ways the New Stock Market Rollercoaster Could Affect Life Insurers

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What You Need to Know

  • Life insurers often get asset-based revenue.
  • Some insurers tie fees to the value of the guarantees, not the assets.
  • Cash is king right now. Life insurers say they have plenty of cash.

Clients with life insurance and annuities may be watching the bear market rummaging around on the mutual funds’ picnic table, and wondering what it means for them.

The answer is: It depends.

Campers know that bears hardly ever go into the tents of responsible campers. But what if campers accidentally left some toothpaste in their backpacks?

And just how crazy is that bear?

Life insurers, advisors and clients now have to wait to see just how good life insurers were at bear market proofing.

The Bear Market

The stock market enters a bear market what stock prices drop 20% or more from recent highs.

Because of efforts by the Federal Reserve Board to wean the economy off cheap borrowed money, and concerns about turmoil in Europe, droughts, COVID-19, supply chain disruption and other factors, stock prices have become much less predictable than they have been for most of the past two years.

The S&P 500 stock index closed Thursday at 3,666.77, down 24% from a Jan. 3 high of 4,796.56.

The Chicago Board of Options Exchange VIX index, a “fear gauge” that reflects the volatility of the S&P 500 Index, closed at 32.95.

That’s not nearly as high as it was in early March 2020, when investors began to understand the implications of the COVID-19 pandemic, and the VIX closed at over 65. But the VIX is noticeably higher than it was from around April 2021 through January, when it usually bounced between about 15 and 21.

What It Means

Here are five ideas about what the bear market means for life and annuity issuers.

1. Clients could swarm on life and annuity products with benefits guarantees like ants on a candy bar that fell under the picnic table.

Sales of products such as non-variable indexed annuities and non-variable indexed universal life insurance policies soar, as clients flocks to arrangements that can protect them against further drops in stock prices but help them share in gains if and when prices go back up.

2. Life insurers may be happy to sell those clients products with some types of guarantees.

Because of a combination of risk management strategies and regulatory constraints, life insurers like using high-grade corporate bonds to support life and annuity product guarantees.

At the start of the month, overall yields on bonds were already about 2 percentage points higher than they had been recently. This week, the Federal Reserve Board pushed a key interest rate it controls, the federal funds rate, up 0.75 percentage points, to a range of 1.5% to 1.75%. That could help increase life insurers’ bond earnings even more.

3. Liquidity concerns could make life insurers look beautiful.

Market observers have complained that one challenge the investment markets are facing is a decrease in liquidity, or the ability to close stock sales.

That could reflect a drop in investors’ access to cash.

Life insurers do not invest much in the stock market. but because of concerns about the possible effects of the COVID-19 impact on life insurance death claims, and on the need for cash, life insurers have been carrying more cash than normal.

Ken Tanji, the chief financial officer at Prudential Financial, told securities analysts in May, when the company went over earnings for the first quarter, that the company had $3.6 billion in cash and liquid assets.

Ed Spehar, the Brighthouse Financial CFO, said Brighthouse ended the first quarter with $1.4 billion in liquid assets. He described the company’s level of liquidity as “robust.”

In recent years, interest rates have been so low, and attractive investment opportunities so scarce, that life insurers have focused on talking to securities analysts about how they would pump up outside shareholder returns by using cash to buy back shares of their own stock.

Higher rates on bonds, and increased corporate borrowing needs, could give life insurers attractive alternatives to buying back their own stock.

The clients have plenty of cash, too.

Ameriprise Financial CEO Jim Cracchiolo noted in April that his company’s clients were holding $46 billion of the $832 billion in assets they had entrusted with Ameriprise in the form of cash.

“High cash balances represent a significant revenue opportunity for us,” Cracchiolo said.

4. Stock market volatility could increase life insurers’ hedging costs.

Life insurers have been using derivatives arrangements to provide some types of life and annuity product guarantees.

Increased volatility makes some types of hedging arrangements more expensive. That could lead to life insurers tilting away from guarantees backed by derivatives and toward guarantees backed by bonds.

5. Surprises could appear.

In 2008, AIG discovered that a unit that sold collateralized debt obligations, or derivatives arrangements that hedged mortgage-backed securities risk, were facing enough losses to destroy AIG and, possibly, the world financial system.

Regulators have been working ever since to develop better ways to track risk at life insurers, but some insurers could discover that strategies that seemed safe in 2021 are less safe in a bear market.

(Image: wladimir1804/Adobe Stock)


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