Life and Annuity Issuers Show Their Interest Rate Pain

What You Need to Know

  • Life insurers use interest maintenance reserves to smooth out interest-related gains and losses over the life of an asset.
  • Actuaries, regulators and accountants are having deep philosophical debates about how the use of IMRs should work.
  • For agents and advisors, the takeaway is that, in 2022, at the typical life insurer, IMRs fell sharply.

How much have spiking interest rates squeezed life and annuity issuers in the past year?

Enough to give the issuers’ rate-smoothing reserves a big, hard, painful pinch.

The big U.S. life insurers that Fitch Ratings watches put about $15 billion in realized losses into their interest maintenance reserves (IMRs) in 2022, after putting $15 billion in gains into their IMRs in 2020, and about $9 billion in gains into their IMRs in 2021, according to a new report.

Those insurers’ combined IMR balances fell 57% between the end of 2021 and the end of 2022, to $12.5 billion.

What It Means

Jack Rosen and Jamie Tucker, the authors of the Fitch IMR analysis, say falling IMRs might not mean much for the financial health of the life insurers that Fitch rates.

“Fitch expects life insurers’ strong liquidity position and matching cash flow strategies should mitigate the effect of continued realized losses in the near term as volatility is expected to persist in 2023,” the analysts write.

The analysts’ summary may imply, however, that insurers with weak efforts to manage cash flow could run into problems this year.

The Background Numbers

The American Council of Life Insurers shows in its 2022 Life Insurers Fact Book that all U.S. life insurers had about $40 billion in interest maintenance reserves at the end of 2021, up 15% from a total of $35 billion in 2020, as a result of volatility that led to strong realized interest-related gains.

Insurers’ total policy reserves increased 2.1% over that same period, to $3.4 trillion.

Between 20211 and 2021, life insurers’ IMRs increased by an average of 6.8% per year, while their total policy reserves increased by just 2.7% per year.

Interest Rates and Life Insurers

Economists believe that increasing interest rates can cut inflation by keeping people from using cheap borrowed money to buy and drive up the prices, of stocks, houses, companies and other important goods and services.

The Federal Reserve Board has acted on that belief by trying to push interest rates higher over the past year, by increasing the rate banks and credit unions charge when they make overnight loans to other financial institutions.

Because of factors such as tax rules, a need to hold safe assets and a hunger for investment income, U.S. life and annuity issuers tend to invest heavily in U.S. corporate bonds with an A rating.

The single-A issuers have high enough ratings from S&P Ratings, Moody’s and Fitch to look safe, but low enough ratings that they must pay higher interest rates than issuers with AA or AAA ratings.

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