Higher Interest Rates and Life Insurance and Annuity Companies
The direction and level of interest rates have considerable impact on life insurance companies and their reported financial results. This is the result of several factors, which include but are not limited to the following
Below Investment Grade Bond Exposure for Life Insurers
Below Investment Grade (BIG) bonds consist of all bonds rated BB+/Ba1 or lower by public rating agencies.
In the statutory financial statement, there are four different “Classes” of BIG bonds (and their S&P ratings):
Florida Domestic Insurer Market Update
It is fitting to be updating this Florida Domestic Insurer market review in 2022, a year which marks the 30th anniversary of Hurricane Andrew. This storm, which made landfall as a category 5 hurricane, wreaked extensive property damage in Homestead and surrounding environs, but more importantly upended the personal and commercial property insurance market in the entire Sunshine State. (Re)insurers realized all at once that their rates were wholly inadequate for the exposure to potential catastrophic wind losses. Carriers began exiting the market en masse, resulting in a coverage crisis.
Mortgage Loan Exposure for Life Insurers
Mortgage loans have long been an important asset class for life insurers. These assets involve the insurer
making a loan directly to a real estate developer or other property owner, rather than an investment in real
estate via less direct methods such as commercial mortgage-backed securities (CMBS), real estate
investment trusts (REITs), joint venture real estate assets, or the debt securities of real estate related firms.
BBB-rated Bond Exposure for Life Insurers
Life insurers significantly increased their holdings of NAIC Class 2 bonds (bonds with BBB/Baa ratings
public rating agencies) in the years since the financial crisis of 2008-2009.
U.S. Life Insurer Exposure to Less Liquid Bonds
Life insurers have long held a mix of assets with various liquidity profiles, from the very liquid to the
nearly illiquid. Investments with the highest liquidity include investment grade bonds (especially
government bonds), securities with a short remaining duration, and cash and cash equivalents.
Mortality for the Life Insurance Industry in 2021
The emergence of the Covid-19 pandemic in early 2020 contributed to record levels of mortality for the U.S. life
insurance industry. Direct deaths due to Covid infections and complications played a significant role, especially
given the newness of the virus, the lack of Covid-19 vaccines until early 2021, and therapeutics and other
treatments that were either non-existent or of limited effectiveness.
How Financially Sound Are Your BOLI Investments?
Our recent study of Bank Owned Life Insurance (BOLI) investments by the largest 150 U.S. banks showed that the average exposure to this asset class was 1.5% of total assets and 14% of common equity. While BOLI is by no means a sizeable asset for most banks, 10% of banks had exposure that ranged from 23% to 32% of total bank common equity – a potentially painful hit to capital should this investment not perform as expected.
The Spectrum Approach to Insurer Financial Oversight – Life
Adopting a binary approach to the consideration of an insurer’s financial strength; i.e. that the carrier is either solvent (good) or insolvent (bad), is a common and potentially costly due diligence mistake. As historically not very many life insurers become insolvent (though more do so in the property & casualty and medical health insurance sectors) , distributors of their products may conclude that carrier financial oversight is therefore either unnecessary or something to be passed over lightly. While we agree that insolvency always equals a bad outcome, it does not follow that all solvent companies are necessarily “good.”
The Spectrum Approach to Insurer Financial Oversight
Adopting a binary approach to the consideration of an insurer’s financial strength; i.e. that the carrier is either solvent (good) or insolvent (bad), is a common and potentially costly due diligence mistake. As historically not many insurers become insolvent (though more do so in the property & casualty and medical health insurance sectors) , distributors of their products may conclude that carrier financial oversight is therefore either unnecessary or something to be passed over lightly. While we agree that insolvency always equals a bad outcome, it does not follow that all solvent companies are necessarily “good.”