In early November last year, industry group the American Council of Life Insurers (ACLI) published its annual Life Insurers Fact Book, the organisation’s deep dive in to a range of sub-categories of the US life insurance industry.
As always, there are many notable takeaways from the document. Some of the most notable include the following:
- After a record high for total claims payments made on life insurance contracts in 2021, 2022 saw a fall back. Death claims paid on individual life contracts fell 7.7% from $73bn to $66bn
- Surrender payments rose 5.3% from $27.4bn to $28.8bn
- Aggregate assets of insurers receded to $8.3trn from £8.7trn, but they’re still up from 2020 which stood at $8.2trn
- Insurers’ total Interest Maintenance Reserves (IMR) fell 43.3% to $28bn
- Insurers’ total Asset Valuation Reserve (AVR) fell 8.8% to $88bn
- Capital Ratios including AVR dropped to 10.5% from 11.1% and the measure for their excess surplus capital compared to the regulatory minimum (the Risk Based Capital Ratio or RBC) dropped marginally from 443% to 426%
- Premium income on life insurance products rose 3.3% from $165bn to $170bn (individual contracts being $137bn to $139bn of which $19bn was the first year’s premium on new regular premium contracts which was marginally down from $21bn in 2021)
These observations are notable for many reasons. The economic backdrop to 2022 was one which saw most central banks, including the Fed, only just starting to react seriously to the emerging inflationary risk with regular hikes in central bank lending rate. Russia’s attack on Ukraine causing an energy price squeeze compounded the inflationary pressures, leading to the yield on benchmark 10-year US Treasuries rising from 1.5-% to 3.9%. The S&P 500 fell from 4,766 at the start of the year to 3,840, a drop of 19.5% that is very close to the 20% ‘full-blown bear market’ territory.
Meanwhile, by the end of the year, US price inflation had fallen to 6.4% after starting the year at 7.5% and peaking at 9.1% mid-year. Despite the downward trend in H2, consumers had experienced a year of prices rising at levels they had grown unaccustomed to over more than a decade and the effect hit household budgets hard.
An increasing proportion of life insurer’s business is from the annuity stream which is primarily matched by bonds and other credit assets. Whilst the value of those assets fell as yields rose, so too did the liabilities. The drop in bond values hit the IMR reserves hard from capital losses, but the impact on the RBC ratios was relatively small, demonstrating how resilient a life insurer is to market volatility if they maintain well-matched assets.
Equities represent a relatively low fraction of total assets although they do tend to support proportionately more of the life insurance book, and whilst the drop in equity values was less than it was for bonds, 2022 was not a good year. Tech stocks, which have an outsized influence on equity index performance, have had a roller coaster ride since March 2020, with valuations, having surged in 2021, unwinding significantly in 2022, nearly all of which has been captured in this year’s ACLI figures – and notably in the drop in insurers’ AVRs.
Death claims dropped in 2022. It’s likely that the surge in Covid-related claims in 2020 and 2021 falling away had an impact here. The ACLI report publishes insurer’s experiential mortality rates (but only a year in arrears, so the 2022 values are not yet available) and the age-standardised mortality rates insurers experienced in the years 2018-21 were 7.2, 7.2, 8.4 and 8.4 (per 1,000 lives, males and females combined). The step up between 2019 and 2020 is 16.7%, a significant uplift, likely due to Covid. The drop in the value of claims paid by only 7.7% suggests that the mortality experience in 2022 still is being affected by Covid, either directly, or from the emerging longer-term effects of people with early stage diseases such as cancer not presenting in a timely manner during lockdowns.
In contrast to death claims, surrender payouts rose by value. The numbers of surrenders are not provided in the ACLI report, so it’s not possible to be certain that a rise in the surrender value also means a rise in the actual numbers of surrenders. However, it is hard to see policies that attract surrender values rising substantially in value during the year because where policies have accumulated value that can be paid out as a surrender value, the value per policy is unlikely to have been noticeably larger in 2022 than 2021, or certainly not 5.3% or more larger. If this theory is correct, this means that an increased number of policies were surrendered in 2022.
An obvious cause for the rise would be financial pressures on households and, whilst US jobs numbers have held up, there will have been pockets of job losses potentially forcing policy cancellation. Weaker economic growth into 2023 and darker recessionary clouds on the horizon suggest some continuance of these patterns for a while yet, which means that the life settlement industry stands to help more policyholders unlock further value during this period.
If times are bad for many policyholders, leading to higher lapse rates, then it ought to be true that new product sales would be impacted. The ACLI figures do bear out a small drop in new regular premiums but, as with the surrender value data, we don’t have information on numbers of new policies written in 2022 (we have only the aggregate premiums). It is not entirely inconceivable that certain product types have witnessed reductions in sales whilst others have grown as customers requiring protection products seek out the cheapest options, and Universal Whole of Life with age-based charging may have a marginal edge over level premium alternatives. The reported figures may just be a case of people opting for smaller face amounts to fit with their current budgets. Either way, the drop in new regular premiums is not unexpected in a difficult economic climate and a small reduction in such a difficult year is not a harbinger of a systemic decline in new policy sales.
Overall, the top-line data from the ACLI’s 2023 Life Insurers’ Fact Book suggest an industry that has weathered the dual impacts of Covid and the macroeconomic challenges of the past almost four years rather well.
Roger Lawrence is Managing Partner at WL Consulting