November Update: Valuation Interest Rate Changes for Life and Annuities

Status:The 2023 Valuation Rate determination window commenced July 1. The significant rise in key rates over the last few months has had a material impact on trends for where valuation rates are headed, particularly for annuities.

The Moody's Corporate Average Yield Rate (MCAYR) for October 2022 is 5.73% -- up 55 from September’s rate. A few days into November, the daily rate is higher still (~5.95%).

In total, the rate is up 2.76% since December. This value remains well above (by 269 basis points) where the rate was last year (3.04% in October 2021), and in a range not seen since Winter/Spring 2010 (5.7-5.9%).

Putting this into context, however, it is unlikely that we will see any changes to life valuation rates until 2025, but a change for that year is almost certain based on current trends.

Life Valuation: The 2023 Life Reserve Rate is 3.00% and the Life Nonforfeiture Rate is 3.75% --identical to the 2021-2022 rates (though companies had until December 31, 2021, to implement the 3.75% rate).

-- In order for there to be a return to 2013-2020-era valuation rates (i.e., to a 3.50% Life Reserve Rate, with a 4.50% Life Nonforfeiture Rate), this would require a sustained rise in rates—which we have seen over the last several months. However, for 2024 issues, the MCAYR would have to average 6.11% or higher for the succeeding 8 months (November 2022-June 2023). For 2025 issues, on the other hand, the rate would only need to average 4.22% for the next 20 months (through June 2024). At present levels (MCAYR in the 5.7-5.9% range) this latter scenario is very likely, though inflationary pressures over the coming months will continue to alter this dynamic.

-- In order to see valuation rates fall/decrease (i.e., to a 2.50% Life Reserve Rate, with a 3.25% Life Nonforfeiture Rate), interest rates would need to dramatically reverse course—something which is extremely unlikely given the current environment. For context, for this to occur even for 2025 issues, the MCAYR would have to average 1.92% or lower for the next 20 months (November 2022-June 2024).

Immediate Annuities: With the introduction of VM-22, which governs the valuation of income annuities effective January 1, 2018, the timing and determination of valuation rates has changed dramatically. This change impacts all life insurers.

Specifically, valuation rates for all "non-jumbo" contracts (i.e., those with an initial deposit less than $250 M) now vary by period certain length and, if life contingent, issue age. Furthermore, these rates will vary by quarter (as opposed to year) of issue, and are based on a moving average of U.S. Treasury rates, current market credit risk additions, and current average market credit loss charges.

Rates are published quarterly by the NAIC, and, for contracts issued during the fourth quarter of 2022 (i.e., between October 1 and December 31, 2022), the rates are as follows:

Issue Ages: 0-69 70-79 80-89 90+ Non-Life
Period Certain less than or equal to 5 Years: 4.25% 4.25% 4.25% 4.00% 4.00%
Period Certain greater than 5 but less than or equal to 10 Years: 4.25% 4.25% 4.25% 4.25% 4.25%
Period Certain greater than 10 but less than or equal to 15 Years: 4.25% 4.25% 4.25% 4.25% 4.25%
Period Certain greater than 15 Years: 4.25% 4.25% 4.25% 4.25% 4.25%

All four rates increased between 25-50 basis points, and a full 2-3% over the prior year fourth quarter's value.

For a full listing of 2018-2021 (prior years) “Non-Jumbo” Valuation Rates, please see links at bottom of page; we update these charts as new information is made available.

Valuation rates for “Jumbo” contracts (i.e., those with an initial deposit $250 M or greater) will vary by day of issue, and are available via the NAIC website here.

Deferred Annuities: 2022 Valuation rates for single premium and flexible premium product types are locked in, with rates between 3.0%-3.5% (representing 0-50 bp increase from 2021 rates). Given the recent rise in key interest rates, the valuation rates will rise, but by how much remains to be seen.

At present, 2023 Valuation rates for Annuities are on track to be 0.25% to 1.75% higher (i.e., from the 3.0-3.5%) due to recent trend lines—and likely to rise even further should trends continue.

The Five-Year CMT rate as of October is 4.18% -- this is up 48 bp from September's rate, and has not been this high since October 2007 (at 4.20%).

The minimum dynamic annuity crediting rate now resolves to 2.95% -- up significantly from the prior month, and the highest it has been since the dynamic minimum approach was adopted.

All of this means that companies which have language in annuity contracts with an affected/upcoming reset should be prepared for possible major contract impact/implications.

Here is a spectrum of possible guaranteed minimum rates, based on potential Five-Year CMT rates:

-- if the Five-Year CMT rate is 2.27% or lower, the Minimum Guarantee Rate is 1.00%;<-- this is where we had been for several months.

-- if the Five-Year CMT rate is 2.28% to 2.32%, the Minimum Guarantee Rate is 1.05%;

… and so on

-- if the Five-Year CMT rate is 4.13% to 4.17%, the Minimum Guarantee Rate is 2.90%;

-- if the Five-Year CMT rate is 4.18% to 4.22%, the Minimum Guarantee Rate is 2.95%; <-- this is where we are currently.

-- if the Five-Year CMT rate is 4.23% to 4.27%, the Minimum Guarantee Rate is 3.00%;

… with this being the highest possible rate guarantee for most plan designs.

What this change means is that insurers offering dynamic minimum guarantee products should review their product guidelines, as well as how various eras of plan codes are set up/managed in their administration systems. We will keep our clients apprised of these changes and suggested actions as this trend evolves.

Please see our 2023 Valuation Rate profile for more details. A full, downloadable 2022 Valuation Rate profile is also available, as well as that for prior years 2021, 2020, 2019 and 2018.

(Note: pop-up windows must be enabled to view interest rate profiles)

Griffith, Ballard & Company will continue to monitor and report on these rate trends, and what they mean for insurance companies and fraternal benefit societies. If you wish to discuss these and other issues in more detail, please contact our office.