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Life Health > Annuities > Fixed Annuities

5 Factors Shaping Life and Annuity Providers' Q2 Performance

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What You Need to Know

  • The companies that promise to protect your clients against death, disability, long-term care risk and longevity risk faced a storm of lemons.
  • Market-shaping factors had the potential to benefit some insurers while harming others.
  • Steadily rising rates should be lemonade for any life and annuity issuers with ordinary, plain-vanilla portfolios.

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.

(Image: Pixel-Shot/Adobe Stock)