Biggest Threat to Life and Annuity Issuers This Year? Themselves.

What You Need to Know

S&P doubts even a recession would do much to issuer capital levels.
Some securities analysts wonder about the capital needed to support all of the new annuities.
Ameriprise is backing away from new variable annuity sales but not rushing to sell in-force blocks.

Earnings releases for the fourth quarter of 2022 could continue a period that’s just fine for U.S. life and annuity issuers, as long as they don’t do anything to rock the boat.

The issuers posted pretty good earnings for the first three quarters of 2022, and life insurance analysts at an S&P Global insurance conference struggled Thursday to come up with ideas about major threats facing life and annuity issuers now.

Securities analysts at firms such as Morgan Stanley and Wells Fargo have also struggled to identify clear threats.

What It Means

The coming year could be difficult for clients who have shorted life and annuity issuer stocks, but it could be good for clients who are counting on insurers to make good on the promises in their life insurance policies and annuity contracts.

The S&P Analysts

S&P rates whether bond issuers will make their bond payments, and whether insurers will meet insurance policy and annuity contract obligations.

Carmi Margalit and Heena Abhyankar suggested at the S&P conference that factors such as a big COVID-19 surge, rising interest rates or falling earnings on alternative investments could cause problems for some issuers.

Margalit noted, for example, that rapidly rising interest rates caused “disintermediation,” or rapid movement of cash from low-rate products to high-rate products, at some life insurers in the late 1970s and early 1980s.

“Disintermediation is something we’re closely monitoring,” Abhyankar said.

Similarly, the analysts acknowledged that a recession worse than the 2007-2009 Great Recession could be a concern. But they noted that their modeling implies that even a severe recession would have little effect on capital levels and financial strength at the big life and annuity issuers they track.

If life and annuity issuers do get into trouble, it will likely be because they bring trouble onto themselves by investing too much in high-risk assets, or by getting into competitive wars over product pricing and underwriting standards, Abhyankar said.

The Securities Analysts

The analysts who help investors follow stocks are citing COVID-19 and drops in some life insurers’ capital levels as forces that could, possibly, make news this year.

At Morgan Stanley, for example, Nigel Dally and Erica Reynolds have pointed out that strong annuity sales could cause some strain by requiring issuers to set aside capital to support all of the new business they have sold.

At Wells Fargo, Elyse Greenspan and other analysts noted that their earnings estimates for the fourth quarter now include about 40,000 COVID-19 deaths, up from an original estimate of 15,000.