As we get ready to close the books on 2024, the US economy continues to expand, though the labor market has weakened, painting a picture of a coming deceleration in growth. With both growth and inflation likely to continue slowing, the door is wide open for the Federal Reserve to continue rate cuts, which should forestall a more negative economic outcome. Still, the path of interest rates isn’t certain and some inflation risks remain. A policy regime change from new US leadership creates uncertainty, and continued geopolitical tension bears monitoring.
North America insurance market growth remains fragmented. Life insurance in force has extended its decade-long flat trend, while annuity sales continued outpacing other life products. Growth was driven mainly by record fixed annuity sales: annual sales have nearly tripled since 2021, as higher rates have made these products more attractive to policyholders. Variable annuity sales have rebounded to 25% growth year to date, driven by record sales in registered index-linked annuities, up 39%.
Annuities tend to have much shorter contract durations than traditional life and long-term-care products, creating a home for shorter duration assets with attractive yields—breaking the mold of insurers investing solely in long-duration assets. It can also be argued that insurers could be a better asset liability management (ALM) fit than banks in providing long-term financing. Life insurers with spread-lending capabilities continue optimizing their funding sources, such as Federal Home Loan Bank (insurers’ usage has topped $160 billion) and funding agreement backed notes (issuance is up over 50% year-over-year).
In an even more fragmented property and casualty market, more-frequent catastrophes have increased claims, creating a liquidity need for certain insurers. Some others have benefited from rising property values which have led to high insured value, higher premium, and higher investments needs. We’re seeing a shift in investment strategy from capital gains to a more balanced approach between income (book yield) and total return while also balancing equity gains with fixed-income losses. The use of reinsurance strategies continues.
Reinsurance volumes have picked up in 2024 after a quieter 2023, with Bermuda remaining the preferred offshore choice. The reinsurance market bears watching: heavier healthcare use and medical cost inflation could prompt more transactions, perhaps spurred by the recent announcement of a Manulife-LTC transaction. Reinsurance sidecar launches and new fund raising is up, as asset managers, insurers and other interested parties seek more ways to tap into the value in the insurance sector.
We expect these trends to continue, influencing insurance investment strategy. As we prepare to head into 2025, we see a few key themes emerging:
- Maintain duration positioning close to target and be nimble on fixed vs. floating rate exposure
- Emphasize quality and diversification as the credit environment softens
- Express relative value views through marginal changes to allocations and liquidity raises
- Favorable supply from bank pullback and demand technical from strong annuity sales would provide plenty of access to private market potential…but diversify across existing and new opportunities
- Maintain focus on portfolio liquidity and cash management
