November Update: Valuation Interest Rate Changes for Life and Annuities

Status: The 2020 Valuation Rate determination window commenced July 1, 2019, and we will continue to revise rate projections over the coming months.

The Moody's Corporate Average Yield Rate (MCAYR) for October 2019 is 3.41% -- a drop of 1 bp from September's rate, though down 113 basis points versus last year (from 4.54% in October 2018). A few days into November, the daily rate is slightly lower (to 3.37%).

Life Valuation: The 2020 Life Reserve Rate is 3.50% and the Life Nonforfeiture Rate is 4.50% -- this is expected to be the case in 2021 as well, but a lot depends on the movement of the key driver, the Moody’s Corporate Average Yield Rate (MCAYR).

To trigger any rate decreases for 2021 issues (i.e., to a 3.00% Life Reserve Rate, with a 3.75% Life Nonforfeiture Rate effective the following year), the MCAYR would have to average 3.35% for the next 8 months. This means we would need to see the rate drop to levels slightly lower than present and stay that low or lower for a reasonable period of time to see any changes. While it is too soon to tell, given the current rate environment we will be monitoring this closely.

Alternatively, the rate would have to increase dramatically in order to see Life Reserve and Nonforfeiture Rates revert to 2012 levels (4% and 5%, respectively), and even then it would be a number of years before we would see an impact. For example, for that to happen for 2022 issues, the MCAYR would need to average 5.76% for the next 20 months. This scenario is extremely unlikely at this time.

Therefore, it appears the current Life Reserve and Life Nonforfeiture Rates are locked in place for the foreseeable future.

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 2019 (i.e., between October 1 and December 31, 2019), 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: 3.00% 2.75% 2.50% 2.25% 2.25%
Period Certain greater than 5 but less than or equal to 10 Years: 3.00% 2.75% 2.50% 2.50% 2.50%
Period Certain greater than 10 but less than or equal to 15 Years: 3.00% 2.75% 2.75% 2.75% 2.75%
Period Certain greater than 15 Years: 3.00% 3.00% 3.00% 3.00% 3.00%

These are all 50 basis points lower than the prior quarter (July 1-September 30).

For a full listing of 2018 (prior year) “Non-Jumbo” Valuation Rates, please go here; we will update this chart 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: 2019 Valuation rates for single premium product types are locked, in the range of 3.50% to 4.00%; analogous rates for flexible premium product types also range from 3.50% to 4.00% (in both cases representing 0-25 bp increases from 2018 rates).

Trends for 2020 Valuation rates, should the MCAYR remain at present levels (~ 3.2-3.4%), suggest the likelihood of modest, if any, decreases (25 to 75 bp, depending on the type and duration), with rates in the 3.25% range—though it is still way too early to tell whether the low interest rate environment will persist.

The Five-Year CMT rate as of October is 1.53% -- a drop of 4 bp from September's rate. This is 74 bp below the average the rate has been over the preceding 12 months (2.27%)—and is in line with the trend of declines we've seen over the last year.

 The minimum dynamic annuity crediting rate resolves to 1.0% -- down 75 bp from where it had been just 12 months ago. The recent peak (Oct. ’18 at 1.75%) was the highest it had been since August 2008 (1.90%).

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,  (where we are currently) the Minimum Guarantee Rate is 1.00%;

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

-- if the Five-Year CMT rate is 2.33% to 2.37%, the Minimum Guarantee Rate is 1.10%;

-- if the Five-Year CMT rate is 2.38% to 2.42%, the Minimum Guarantee Rate is 1.15%;

-- if the Five-Year CMT rate is 2.43% to 2.47%, the Minimum Guarantee Rate is 1.20%;

… with the pattern continuing at similar intervals.

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 2020 Valuation Rate profile for more details. A full, downloadable 2019 Valuation Rate profile is also available, as well as that for 2018.

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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.