The longer-term outlook for life insurance companies is a positive one — provided the companies can navigate low interest rates successfully.
A poll of attendees at the Standard and Poor's annual insurance conference in New York on Thursday revealed that 54% of the participants believed that low interest rates are the greatest risk facing life insurance companies. Policyholder options and guarantees came in second, with 21% of the vote.
Even though interest rates have been low for years now, they remain a primary concern among investors who are interested in life insurers.
Low interest rates hurt insurers primarily because carriers are heavily invested in bonds. As low rates hurt bond returns, it affects carriers' profitability and places pressure on interest-rate sensitive products, such as universal life insurance, fixed annuities of all types and variable annuities with guaranteed living benefits. Indeed, the 10-year Treasury — the key rate for life insurers — is currently sitting at 2.6%.
All will be well if insurers watch the credit quality of their investments and as long as rates rise gradually, analysts at the S&P conference noted.
“The consensus at the start of this year was for higher rates; we haven't quite seen that materialize yet,” said Matt Daly, director of credit research at Conning Asset Management and a panelist at the S&P conference.
“I think if rates tick back down below where they were, we'll be back where we were: eyes will be on balance sheets, questioning reserve adequacy,” he added. “The new money yield is very challenging.”
Such a change wouldn't happen overnight, however. Carriers' investment portfolios only turn over every six to seven years, depending on the products a given company offers, according to Carmi Margalit, director at S&P's Ratings Services.
“It's a slow compression in spreads and slow bleed in yields,” Mr. Margalit said. “Insurers have been investing in a sub-3% to 4% [10-year] Treasury [environment] for 10 years now and the effect that has on reserves — it isn't as big of a cliff as people are talking about.”
This also means that life insurers need to keep a close eye on their investment portfolios and be smart about chasing yields.
“The answer isn't having a more aggressive investment portfolio,” said Ted Mathas, chief executive of New York Life Insurance Co. He noted that there are opportunities at the margin that carriers can take advantage of without affecting their risk profile. “It's taking on illiquidity risk, not taking on more credit risk,” Mr. Mathas said.
He noted that the appetite for risk will depend on the carrier. “I don't think you see material changes in the portfolios across these three companies,” including New York Life,
MassMutual Life Insurance Co. and
Prudential Financial Inc., Mr. Mathas said. “But [for] the institutions purchased by
private equity companies, you did see a big change in asset allocation, and they got riskier.”
Analysts, meanwhile, are cautious about the use of illiquid investments as a way for carriers to juice yields. “We're cautious as to what type of risk might be slowly creeping into investment portfolios,” said Mr. Daly. “There's a trade of giving up liquidity and picking up illiquidity.” He highlighted commercial-mortgage loans and private-placement loans as investments that provide enhanced yield at lengthier durations.
Obstacles notwithstanding, the outlook for carriers going forward is positive. “The base scenario we're looking at — gradually rising rates — is good news for insurers as long as the pace is slow,” Mr. Margalit said.
For the vast majority of the insurers that S&P covers, Mr. Margalit expects no potential for ratings movement either up or down. Last year was the first year since 2007 when ratings upgrades for life insurers outpaced downgrades, he added.
