Less than a year ago we reported that AM Best published a special report in which the rating firm issued a negative outlook on the US life insurance and annuity market. They cited the continuing low interest rates, a flattening yield curve, regulations, potential for market corrections and the need for innovation as the major reasons for the outlook. The report highlighted one potentially harmful issue – an abrupt increase in interest rates noting that insurance carriers prefer a slow increase to rates that “allow them to adjust their credited rates on liabilities and their asset portfolios to optimize returns.”
Recently the agency upgraded their life and annuity outlook from negative to stable for 2019, mentioning the moderately increasing interest rates as one of the positive factors. Other positive indicators were strong sales in the annuity segment which had been down, as well as strong sales in indexed universal life.
According to the AM Best report, lower effective tax rates going forward will be a boon to the overall profitability of the carriers, as will the general increase in carrier investment returns.
It is this increase in carrier returns that will be most beneficial to TOLI trustees. Policy performance issues have been centered on the downward slope of fixed interest rates over the last two decades which was exacerbated by the economic crunch of 2008-09 and the Federal Reserve System’s actions that drove federal funds rates to near zero over the last 10 years. Most life insurance products are driven by fixed investments and the last two decades have not been kind to these financial vehicles. Dividends in whole life policies swooned and crediting rates in many current assumption universal life policies dropped to their guaranteed lows. Some carriers looking to offset the loss in investment income raised the cost of insurance in their products, creating carrying cost increases of 200% or more and making some policies unaffordable for policyholders, many who could no longer purchase newer, more affordable policies.
This AM Best report provides those of us who manage life insurance for a living with the hopeful prospect that policy performance will improve going forward taking a bit of the pressure off of managing a life insurance portfolio.