November Update: Valuation Interest Rate Changes for Life and Annuities

Status: The 2024 Valuation Rate determination window concluded June 30, 2024— the Annuity Valuation Rates for 2024 and Life Reserve and Nonforfeiture Rates for 2025 are now final.

The significant rise in key benchmarks over the last two years has caused Annuity Valuation Rates to rise notably in both 2023 and now also 2024. This relatively rapid rise also led to the Life Valuation and Nonforfeiture Rates changing for the second time in five years, reverting in 2025 to the levels they were over the span of 2013-2020.

The 2025 Valuation Rate determination window opened July 1, 2024, and this will determine the Annuity Valuation Rates for 2025 and the Life Reserve and Nonforfeiture Rates for 2026 – though these latter rates are not expected to change based on present trends.

The Moody's Corporate Average Yield Rate (MCAYR) for October 2024 is 5.33% -- a rise of 23 bp from September’s rate. Recent daily entries are notably higher (averages ~5.52% on November 4).

Life Valuation: The 2025 Life Reserve Rate is now set to be 3.50% and the Life Nonforfeiture Rate is 4.50% (though companies have until December 31, 2025, to implement the 4.50% rate). These rate changes are increases of 50 bp, and 75 bp, respectively, from the 2024 rates.

The relatively short tenure of the 3.0% reserve valuation rate (and 3.75% nonforfeiture rate)—at just four years—was essentially due to the rapid and persisting rise of benchmark rates since Spring 2022.

As of October 2024, the 36-month average (A36) is 5.01%, lagging behind the 12-month average (A12) at 5.45%. Both measures had been rising for some time, though the short-term average has started to stabilize/decrease while the longer term will continue to rise well into next year.

The critical threshold to trigger a rise in the valuation rates is 5.51%—for if lower of the 12-month and 36-month averages of the MCAYR by the end of the valuation rate window (June 2025) is at or above this value, a change would be effective for 2026 issues. To trigger a fall in the valuation rates, the lower of these averages would need to be at or below 3.35%--which is extremely unlikely at this time.

Specifically, for there to be another change in the near future, the following would have to take place:

--the MCAYR would need to average 2.376% over the next 8 months (i.e., through June 2025) to trigger a fall back (in 2026) to the Life Reserve rate of 3.0% (and Nonforfeiture Rate of 3.75%)

--the MCAYR would need to average 3.355% over the next 20 months (i.e., through June 2026) to trigger a fall back (in 2027) to the Life Reserve rate of 3.0% (and Nonforfeiture Rate of 3.75%)

-- the MCAYR would need to average 6.007% over the next 8 months (i.e., through June 2025) to trigger a rise (in 2026) to the Life Reserve rate of 4.0% (and Nonforfeiture Rate of 5.0%)

-- the MCAYR would need to average 5.506% over the next 20 months (i.e., through June 2026) to trigger a rise (in 2027) to the Life Reserve rate of 4.0% (and Nonforfeiture Rate of 5.0%)

Given the current daily MCAYR is in the 5.50-5.55% range and believed to trend only slightly higher over the coming months, these triggering thresholds do not appear likely to be breached in the near term, though we will continue to monitor these trends.

Comments regarding potential future 7702/7702A rate changes: Our reading of the present regulations is that the rates related to the CVAT, guideline level premiums and guideline single premiums (7702) and 7-pay premiums (7702A) can only change in a year following a Valuation Rate change (i.e., 2026). However, even then, the Insurance Interest Rate (IIR), instituted by S. 7702(f)(11)(A) and which now drives these rates, is on track to reset these rates, at that time, to their current levels (4% for the GSP, 2% for the others)—so no change is anticipated for these rates.

Please see the attached chart, reflecting our interpretation of the applicable regulations. We will continue to monitor these trends and provide updates as relevant information is available.

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 2024 (i.e., between October 1 and December 31, 2024), 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:	4.75%	4.50%	4.50%	4.25%	4.25%
Period Certain greater than 5 but less than or equal to 10 Years:	4.75%	4.50%	4.50%	4.50%	4.50%
Period Certain greater than 10 but less than or equal to 15 Years:	4.75%	4.50%	4.50%	4.50%	4.50%
Period Certain greater than 15 Years:	4.75%	4.75%	4.75%	4.75%	4.75%

All rates moved down from Q3-24 values, between 25 and 75 bp, and have not been this low since Q4-2022. Also, note that some Q1-2025 rates are on track to fall perhaps another 25 bp, due to recent trends. Companies which prefer to be responsive to such changes in valuation rates should note this drop, and potentially lower their crediting rates offered (if they wish to avoid crediting at a level close to or above the valuation rate).

For a full listing of 2018-2024 (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: 2024 Valuation rates for single premium and flexible premium product types are now final, with rates between 3.50-5.25% (representing increases ranging from 25-75 bp versus 2023 rates).

Note that if the MCAYR remains at its current level or even slightly lower, the 2025 valuation rates for annuities are expected to change, but the direction of the change will vary: rising for longer duration annuities (10 years+) by between 25-50 bp, and falling potentially (by 25 bp) for shorter duration contracts (under 10 years). The rate changes will vary depending on Type (A, B, C), using issue year basis.

The Five-Year CMT rate as of of October is 3.91% -- this is up 41 bp from September’s rate. Daily rates, however, have been much higher (~4.2%) since the turn of the month.

The minimum dynamic annuity crediting rate now resolves to 2.65% -- an increase of 40 bp from the prior month.

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 prior to April 2022.

-- 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 3.83% to 3.87%, the Minimum Guarantee Rate is 2.60%;

-- if the Five-Year CMT rate is 3.88% to 3.92%, the Minimum Guarantee Rate is 2.65%; <-- this is where we are currently.

-- if the Five-Year CMT rate is 3.93% to 3.97%, the Minimum Guarantee Rate is 2.70%;

… and so on.

Reminder: for most –but not all— plan designs, this minimum guaranteed crediting rate is typically capped at 3.00%, though companies should review/evaluate their contracts for deviations.

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 2025 Valuation Rate profile for more details. A full, downloadable 2024 Valuation Rate profile is also available, as well as that for prior years 2023 2022 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.