US L/A companies considering non-interest-sensitive investment strategies more than double those deemed interest-sensitive

Written by Adam Cadle

05/08/2020

The number of US life/annuity (L/A) companies considering non-interest-sensitive investment strategies in the last 10 years is more than double those deemed interest-sensitive, AM Best has said.

However, those companies exposed significantly to interest rates have managed an average 76% of the industry’s invested assets in the last 10 years, and have different investment risk tolerances and strategies to aid in backing a product profile that is linked more to interest rates, the credit rating agency said.

“Insurers have been strategically de-risking their product portfolios for some time to counter the impacts on spread compression and earnings volatility,” it said. “Strategies have included exiting, re-pricing or de-emphasising certain business lines, particularly those that are interest-sensitive.

According to AM Best, companies considered interest-sensitive were those with a liability and premium mix concentrated in individual and group annuities, deposit-type contracts and interest-sensitive life products, as defined by the NAIC for statutory statement reporting.

Interest-sensitive companies typically generate the bulk of the industry’s earnings. Based on 2019 capital and surplus levels, interest-sensitive companies have nearly four times the amount of capital on average—approximately $2.3bn, compared with roughly $610m for non-interest-sensitive companies. Commercial mortgage loans remain a staple of life insurers’ investment holdings, growing more than 80% to $578.5bn in 2019 from $317.1bn in 2010. Interest-sensitive companies were responsible for the growth, as their average exposure rose to 8.2% in 2019 from a low of 5.8% in 2010, versus a slight decline in non-interest-sensitive companies, whose average exposure came to 4.2% of invested assets in 2019.

Pre-tax net operating gains have been relatively consistent for non-interest-sensitive companies. In contrast, interest-sensitive companies have reported much more fluctuation over the last 10 years, although earnings have been consistently positive. Interest-sensitive companies also earn higher yields on average than non-interest-sensitive companies.

“The low interest rates will remain a key obstacle as L/A insurers continue to invest new money, as well as the proceeds from higher-yielding maturing assets, into new assets at lower rates,”AM Best said.

The COVID-19-fuelled economic slowdown has amplified the likelihood of dampened earnings in 2020 for spread and fee-driven businesses. AM Best said it believes there is the potential for further swings in the equity markets.

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