Why Life Insurance Assets Might Still Be Safe From Congress

Other topics: Here’s a look at other topics panelists and attendees at the conference discussed.

The overall outlook for life and annuity issuers: Right now, the life insurers S&P rates look strong and their outlook looks good, Margalit said.

He said factors that could change the S&P outlook include a deep recession, frenzied competition that leads to irrationally low pricing, and “disintermediation,” or rapid moves by customers to drop fixed-rate products paying low rates and shift the cash into products paying higher rates.

But Margalit noted that life insurers have already faced a big, rapid spike in interest rates without facing a big surge in disintermediation.

The U.S. office price crash: Commercial mortgage-backed securities account for about 3% of life insurance compaies’ adjusted assets.

Margalit said the effects of the work-from-home movement sparked by the COVID-19 pandemic will likely linger.

“We all know we’re not going to back to work in the office five days a week,” he said. ”Over time, that means vacancies in offices are going to cause delinquencies and are going to cause defaults. There is going to be pain that is going to be felt.”

But life insurers will probably benefit from the fact that they have been very careful about choosing their borrowers, he said.

Interest maintenance reserves: Life insurance regulation watchers have been talking excitedly for years about how the National Association of Insurance Commissioners might handle insurer concerns about IMRs, or accounting provisions that insurers can use to smooth out some of the statutory earnings changes caused by shifts in interest rates.

Statutory earnings are the financial results state insurance regulators use to measure how well insurers are doing.

Insurers complained that, in the real world, they could only use the IMR provision to adjust earnings when the provision would make their earnings look worse, never when using the IMR total would make their earnings look better.

The NAIC adopted IMR temporary flexibility guidance in mid-2023.

The new guidance will let life insurers use IMR assets to increase their capital and surplus by up to 10% until 2025, according to Anika Getubig, an S&P Global life ratings analyst.

But the rules are complicated, an insurer will have to analyze its situation carefully to see whether using the new NAIC guidance is worth it, and the overall impact on an insurer’s performance may turn out to be modest, Getubig said.

Mary Pat Campbell, a prominent actuary who attended the conference, said an insurer’s capital planning team will have to go through the insurers, bond by bond, to see which bonds could benefit much from using the temporary IMR flexibility.

She said that, because of the way using the guidance would affect reported earnings, the guidance could be more popular with policyholder-owned mutual insurers than with publicly traded life insurers.

Carmi Margalit. Credit: Allison Bell/ALM