Filed Under:Life Insurance, Life Products

The most interest-rate sensitive insurers

MetLife is among the list of life insurers most affected by interested rates, according to SNL Financial.
MetLife is among the list of life insurers most affected by interested rates, according to SNL Financial.

While interest rates are a key area of concern for life insurers at this time, a new report said interest-rate sensitive life insurance premiums constituted only 4.1 percent of total premiums of large insurers for 2012.

The report said insurers with more than $10 billion in premiums had $433.069 billion in premiums written outstanding at the end of last year.

For the entire industry, interest-rate sensitive premiums constituted only 6.20 percent of total premiums of $642 billion.

The report on companies most affected by interest rates was provided by SNL Financial.

According to SNL, interest-rate sensitive products written by Lincoln National, for example, included guaranteed universal life policies, variable universal life, indexed universal life and term life policies.

It is based on data supplied to the National Association of Insurance Commissioners by insurance companies through its Interest Sensitive Life Insurance Products Report.

The report fills in the names to a Moody’s Investors Services report July 15 which indicated that a continued rise in interest rates would be credit positive for the U. S. life insurance sector, as spread products would regain popularity and reinvestment risk would decline.

But, the Moody’s report said there is a downside to higher interest rates for insurers because a rapid spike in interest rates could lead to annuity policyholders jumping to higher-return products at the same time that life insurers' investment portfolios report unrealized losses.

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"We could revise our U.S. life insurance sector outlook to stable from our current negative stance if the recent rising interest rate trend and improving economy continues," said Neil Strauss, Moody’s vice president – senior Credit officer.

"The prolonged low interest rate environment and macroeconomic challenges are major contributors to our negative sector outlook," he said.

“Moody's believes the liquidity profile of most life insurers is strong, mitigating the impact of having to crystallize losses on assets to fund policyholder surrenders,” Strauss said in the report.

Metropolitan Life is the most vulnerable life insurance company to interest-rate risk in terms of premiums outstanding, according to a new report, with Prudential Financial second.

However, MetLife is fourth most vulnerable and Pru 11th most vulnerable to interest-rate risk in terms of the proportion of interest-rate sensitive premiums to total premiums, according to the report.

According to the report, AXA, Lincoln National and Nationwide Mutual insurance are the life insurance companies most vulnerable to interest-rate risk in terms of the proportion of interest rate premiums that are interest-rate sensitive.

The SNL report said interest-rate sensitive life premiums constituted 16.5 percent of all AXA premiums. For Lincoln it was 14.47 percent; the proportion was 12.28 percent for Nationwide.

The report said MetLife had the fourth-highest proportion of interest-rate sensitive life insurance premiums to total premiums at 7.88 percent, but that total MetLife premiums of $58.7 billion was more than 20 percent higher than the combined total premiums of AXA, Lincoln National and Nationwide.

In other words, MetLife had total interest-rate sensitive premiums of $4.626 billion. Pru was second in terms of actual liability at $2.322 billion in interest rate sensitive life premiums, but that constituted just 3.64 percent of total Pru premiums of $73.382 billion.

New York Life had the third highest amount of premiums written, at $22.080 billion, but interest-rate sensitive premiums were only $1.654 billion, constituting only 7.49 percent of total premiums.

The report said AIG had total life insurance premiums of $15.882 billion, only $860.1 million, or 5.42 percent were interest-rate sensitive.

According to Strauss’ report, rising interest rates would increase appetite for spread-based products, such as fixed rate annuities, which fell out of favor with consumers and insurers given low rates and tight credit spreads.

Prior to the financial crisis and the onset of historically very low interest rates, annuities had been an industry growth engine for about 20 years, Strauss said in the report.

In addition, rising interest rates would reduce reinvestment risk for companies as both new money rates and portfolio yields would rise, the Moody’s report said.

Other products in addition to fixed annuities that would benefit from an increase in interest rates include structured settlements, pension products, universal and interest-sensitive life, and long-term care and long-term disability products, the report said.

However, a rapid and steep increase in rates would be negative for most life insurers. In this scenario, annuity policyholders may flock to new products with higher returns, including bank products which react more quickly to a rise in new money rates, the rating agency said.

At the same time, the market value of insurers' fixed income holdings would decrease due to the rise in rates, leading to unrealized capital losses.

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