Moody's Scopes Out the Hot Summer Life and Annuity Fashions

The analysts note that the life insurers have about 70% of their assets in bonds.

“Life insurers all benefit [as] interest rates rise, both immediately, as they invest new premiums in higher-yielding securities, and incrementally over time, as existing investments mature and are reinvested at higher prevailing interest rates,” the analysts write.

Here are some of the products benefiting from the higher rates:

Specialty health products, such as long-term care insurance and the annuities used to fund the structured settlements associated with lawsuit damage awards.
Interest-sensitive individual life insurance products, such as whole life and guaranteed universal life insurance.
The most interest-sensitive annuities, such as immediate annuities and the group annuities used in pension risk transfer arrangements.

Moody’s analysts see rising wages increasing deposit levels for all kinds of retirement savings arrangements, including 401(k) plans 403(b) plans, 457 plans, ordinary mutual funds and IRAs.

Clouds

The analysts warn that rising wages can increase life insurers’ own administrative costs, and that rising wages may increase claim costs for some types of health policies, such as some long-term care insurance policies that pay higher levels of benefits when the cost of care rises.

The analysts also warn that either a 3-percentage-point spike in long-term bond yields or a persistent period of low economic growth and inflation could weaken life insurers.

A big, rapid rate rise could shift assets out of life and annuity products and into bonds, and that could hurt life insurers’ capital levels and ability to come up with cash quickly, the analysts say.

A combination of inflation and an economic slump, or “stagflation,” could increase insurers’ overall risk levels by hurting their sales, revenue and earnings, the analysts add.

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