June Update: Valuation Interest Rate Changes for Life and Annuities

Status: The 2021 Valuation Rate determination window will commence July 1, 2020. With only one month before the 2020 Valuation Rates determination window is closed and rates are "locked in", there is still much uncertainty as to what these final rates will be - which is a rarity with 11 months of data already present.

The Moody's Corporate Average Yield Rate (MCAYR) for May 2020 is 3.16% -- a drop of 6 bp from April's rate, and down 92 basis points versus last year (from 4.08% in May 2019). A few days into June, the daily rate is down further (3.08%).

Life Valuation: The 2020 Life Reserve Rate is 3.50% and the Life Nonforfeiture Rate is 4.50%. The analagous rates for 2020 are still undetermined, and it is unlikely we will know what these rates will be until a few days after June 30, 2020.

For context: This deep into a given Valuation Rate determination window, we would typically expect to have a firm grasp as to what the upcoming rates would be. However, this year, the June 2020 value for the key driver, the MCAYR, will decide whether a change happens for 2021, or whether it is pushed off for at least another year.

Specifically, if the June 2020 MCAYR is 3.14% or lower, the 2021 Life Reserve Rate will be 3.00% (down 50 bp). In addition, the 2021 Life Nonforfeiture Rate will be 4.00% (down 50bp), floored by he Valuation Manual - although companies are allowed one extra year to implement the change to this particular rate (i.e., effective 2022).

Conversely, if the June 2020 MCAYR is 3.15% or higher, the Life Reserve and Life Nonforfeiture Rates will remain unchanged for 2021 (i.e, 3.50% and 4.50%, respectively).

As noted above, the daily rate of this measure is currently below that 3.15% threshold (at 3.08%), signaling a rate change is likely, but trends could alter course over the next month.

If a 2021 rate change is avoided, to trigger any rate decreases for 2022 issues (i.e., to a 3.00% Life Reserve Rate, with a 4.00% Life Nonforfeiture Rate effective no later than the following year), the MCAYR would have to average 3.35% or less for the succeeding 12 months (July 2020-June 2021). At present levels (MCAYR in the 3.0-3.2% range) this scenario is very possible.

In summary, we will know in the next few weeks whether a rate change will impact next year's (2021) issues, or whether there has been a "reprieve" for at least one more year.

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 second quarter of 2020 (i.e., between April 1 and June 30, 2020), 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% 2.50% 2.25% 2.00% 2.00%
Period Certain greater than 5 but less than or equal to 10 Years: 3.00% 2.50% 2.25% 2.25% 2.25%
Period Certain greater than 10 but less than or equal to 15 Years: 3.00% 2.50% 2.50% 2.50% 2.50%
Period Certain greater than 15 Years: 3.00% 3.00% 3.00% 3.00% 3.00%

These are the same as for first quarter, but for the one rate vector dropping 25 basis points (from 2.75% to 2.50%).

For a full listing of 2018-2019 (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: 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 (~ 3.0-3.2%), suggest the likelihood of modest, if any, decreases (25 to 75 bp, depending on the type and duration), with rates in the 3.00-3.25% range.

The Five-Year CMT rate as of May is 0.34% -- a drop of 5 bp from April's rate, and the lowest ever recorded; prior to this year, the previous record low was in July 2012 (0.62%). This is 113 bp below the average the rate has been over the preceding 12 months (1.47%).

The minimum dynamic annuity crediting rate resolves to 1.0% -- down 75 bp from where it had been in October 2018. The recent peak (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.