S&P: Though recession may loom, life insurers in a good position – Insurance News Net

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The life insurance industry is facing significant headwinds, an S&P Global Ratings’ analyst said this morning, but is strong enough financially to push through 2023.
Speaking during the 2022 Insurance Summit organized by the National Association of Insurance Commissioners, Carmi Margalit, life insurance sector lead, said storm clouds are gathering and it starts with the economy.
“Economists at S&P, they peg the likelihood of a recession at somewhere around 45%,” Margalit said. “Most likely not this year, but towards the middle of next year.”
Even the Ukraine conflict with Russia is resolved and supply chain issues with China disappear, and a full recession is avoided, he explained, the economic forecast remains dim.
“The base case still doesn’t look very appetizing,” he said. “The current forecast for GDP growth for 2023 from our economists is 1.6%, which again is not necessarily a recession, but doesn’t feel anything like the growth we’ve seen in 2021, or even what a normal year is.”
Life insurers are on very sound financial footing, Margalit said, which makes recession talk less worrisome. In fact, insurers are probably better equipped to handle an economic disruption than they were when COVID-19 hit in March 2020, he added.
“The industry is actually very well positioned to handle that,” he explained, “both in terms of just the capital that they have to withstand it and some of the actions that the industry has been taking to prepare in terms of the pivoting to higher levels of credit, higher levels of liquidity in anticipation of a potential recession.”

Interest rates are on the rise, perhaps again this week when the Federal Reserve Board of Governors meets. The aggressive Fed moves are helping life insurers sell more annuities, Margalit said.
“Sales of either fixed annuities or fixed variants of universal life are definitely on the rise,” he said. “And companies are putting much more profitable business on the books today than they were just a year ago even definitely two years ago.”
However, it’s important to remember that interest rates remain historically very low, Margalit noted. While the industry has learned to do business in a low-interest-rate environment, insurers are probably losing business overall.
“Sales of annuities are holding steady,” Margalit said. “There’s a great statistic, I think it’s around 10,000 people turning 65 every day. And in an environment like that you would think that retirement-based products like annuities would be growing a lot more than just holding steady.”

One noticeable trend is the shift in investment allocation among private insurers, Margalit said. The result is a more risky portfolio with a higher percentage of lower-rated securities and other investment options. Insurers simply cannot get the safe return they could 10-15 years ago from a portfolio based in high-rated corporate bonds, Margalit pointed out.
This riskier investment strategy partly reflects the growing private equity stake in the life insurance industry. Still, there is a trend among more traditional insurers to invest in more risk, Margalit said.
“They do have to make up those earnings, those yields somewhere,” he said. “From a risk perspective, we do think that there is some value to doing that. But it does definitely bring more risk to the investment portfolio and through that more risk to the insurance company.”
As always, risk must be assessed in a broader context, Margalit quickly added.
“Simply having a more risky portfolio in and of itself doesn’t necessarily mean that the insurance company has higher risk,” he said. “You have to look at the risk in the investment portfolio in the context of, first and foremost, how much capital they hold against it, and also the robustness of the risk management.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected] Follow him on Twitter @INNJohnH.
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