A 2023 Review & 2024 Predictions – Why Not?
It seems that this time of year, EVERYONE has an opinion about what will happen in the coming 12 months. I “love” reading all the financial pundits speculating on how the economy will perform and which direction the stock market is going, and by how much.
I received the adjacent chart from my personal financial advisor a few days ago and it made me realize just how little we can possibly know about and control the future.
Let me start by saying that those people who are so bold as to predict the future movement of the markets (or the economy) are either arrogant, clueless, or have some other agenda. But I ask myself: “Self? How can they be so consistently wrong?”
Well, they are not always wrong … sometimes they are just lucky. Sometimes it is just better to be lucky than good.
Then there are articles like the following from John Mauldin of Mauldin Economics. Mauldin has a very tempered approach in his newsletter and I find it an interesting read, but is his crystal ball any clearer than anyone else’s? Not likely, his agenda is to sell newsletters, subscriptions, books and promote speaking engagements.
So, if most predictions can’t be counted on, why am I even taking the time to make 2024 predictions? If nothing else, entertainment value. I love these sorts of articles – they make me smile 😊.
Speaking of smiling, I recently attended a Study Group meeting in New Orleans where I had the pleasure of seeing Peter Ricchiuti, Professor of Economics at Tulane University and Founder of Burkenroad Reports. Talk about taking the prediction business to a new level! This is a very smart man, and he takes the driest of subjects, economic and financial predictions, and makes them entertaining. If you want to see a master at this, click the picture just below to watch the video:
It is as if he doesn’t take himself seriously, but he makes a lot of sense to me.
ANYWAY … 2023 was an interesting year for the insurance industry and certainly for AgencyONE. Some key highlights that emerged from 2022/2023 that will continue to create both opportunities and challenges for 2024 are:
Higher Interest Rates – This was a big part of the 2023 story and had several notable impacts:
2023 Products – We saw some meaningful increases in interest rates on some products. Of note, the John Hancock flagship product, Protection UL, had several interest rate increases for both current in force and new policies. For those of us who have been in the industry for a while, we have seen decades of nothing but declining rates on current assumption products. This was great to see, especially from carriers that benefitted existing policyholders. There were also a lot of cap and participation rate increases on the IUL side from a variety of carriers. The same can be said in the Whole Life space with dividend increases. Overall, a great benefit to most life insurance customers.
2024 Prediction – Permanent Life insurance is a great stabilizing asset, it doesn’t matter what kind (UL, VUL, IUL, WL) and LIMRA expects 2023 to end in line with what was a record sales year in 2022. IUL premium softened through the third quarter of 2023, while policy count was up, which leads me to believe that the challenges in the Premium Finance market (see below) impacted the large case IUL market. Expect to see more of that during 2024 as interest rates stabilize at a higher level for premium finance loans. Interestingly, VUL sales were up 20%, driven by a small group of carriers and I am guessing they are John Hancock, Securian, Nationwide and Lincoln, among others. This is reflective of the emergence of these carriers offering GUL products on a VUL chassis. There are other carriers developing similar products as they look to appease the independent market’s addiction to the GUL space, so expect more of that. I also expect 2024 to continue to fuel the Whole Life space as dividend rates increased pretty much across the board.
Premium Financing – Ouch! Those customers who had rate renewals on their commercially premium finance loans saw interest rate increases of double (in some cases triple) the previous year’s rate. I remember in 2021 and into 2022 seeing premium finance rates from banks in the high 2% to low 3% range. New loans in the latter part of 2023 were being offered or renewed north of 7% in many cases. This was a huge shock to customers who had large loan balances and were paying interest to the banks. Cash flowing interest payments became a huge financial strain, and many clients were NOT happy, some wanting to get out of their transactions altogether.
2024 Prediction – While there are a lot of premium finance promoters still marketing their services, I don’t see this part of the market bouncing back in 2024. I think that the combination of higher interest rates and a down year for the S&P 500 in 2022, caused a lot of ZERO’s to be credited to IUL policies. The market took a hit as consumers realized a number of things:
1. The numbers don’t always look like the spreadsheet that was sold to them;
2. That cash flow is required to service these loans; and
3. Collateral calls can and do occur if the cash value doesn’t go up as illustrated.
Private Financing\Split Dollar – In January of 2022 the 7520 rate was 1.6%, while at the end of 2023 it hit 5.8% which put pressure on the financial objectives of some transactions. For term loans, the story was not much different. The Short, Mid and Long-Term AFR rates started in January 2022 at .44%, 1.30% and 1.82% respectively, and started 2023 with massive increases and an inverted yield curve at 4.5%, 3.85% and 3.84% respectively. Rates leveled off during 2023 and the yield curves flattened relatively but now show a bit of a “U” at 5.26%, 4.82% and 5.03% respectively. This also had an impact on transactions that use the Federal AFR rates such as GRATS, CRATS and other discounting strategies.
2024 Prediction – I have always said that I would rather pay myself or my family interest (such as in a private financing transaction) than pay it to a commercial bank. IRS-published rates are more attractive than commercial lending and for those who have the assets to do a private financing transaction, this may replace some of the lost premium from premium financing in the estate and wealth transfer market. I am also a big fan of Split Dollar, and we are seeing more and more of it as a tried-and-true strategy for estate planning and executive compensation. Finally, private financing transactions between the older generation and younger generation(s) are very attractive at many levels. I expect to see more and more interest in this space.
Annuities – If nothing else, this was the most meaningful market impacted by rising interest rates with sales shattering the 2022 record of $313 Billion. While final numbers are not yet reported, LIMRA was predicting over $350 Billion for 2023 and some experts are predicting another record year in 2024. I believe the experts, so I don’t expect the annuity rocket to slow down any time soon. There are other reasons discussed below that also play into this. If you are not offering your clients fixed-rate annuities, someone else will be, so don’t ignore this space.
M&A Activity – As the cost of capital rose, deals got more expensive for buyers and the market cooled with insurance brokerages as multiples came off their peak. M&A activity dropped by 17% according to Marsh, Berry & Co, LLC during 2023. Not much to say here, but as interest rate increases have subsided and the insurance industry has gotten a year older, many practitioners in both the retail and wholesale insurance business are looking to sell before the dry powder runs out in the Private Equity space.
The Sunset is coming, The Sunset is coming – As AgencyONE and many others in the industry have talked and written about, the Sunset Provision of the Tax Cut and Jobs Act of 2017 will take effect on January 1, 2026 – two short years from now. There has been heightened awareness of this amongst the legal, accounting, and financial services professionals during 2023, but clients still seem a bit non-plussed. People with a net worth of over the current gift and estate exemptions, which sits at $13.61MM for individuals ($27.22MM for married couples) in 2024, would be well served to begin taking advantage of the “gift” provided them by TCJA to transfer assets to younger generations during their life or to plan their estates to optimize wealth transfer during the next two years. You don’t have to be in that financial stratosphere, however. High net worth individuals with high incomes and many years left of compounding estates will be well served to do an estate projection and act before the end of 2025. Attorneys will be hammered and generally not as accessible as we get closer to that sunset. Additionally, expect higher income tax rates as well, as we revert to a maximum tax rate of 39.6% versus the current 37%.
2024 Prediction – This year and next will be very busy for those practitioners who call themselves estate and gift tax planning experts. Motivating consumers to see this for what it is, a massive tax planning gift that could benefit the next generation(s), will be the most important activity we can engage in. Income tax planning will also be critical and well-designed life insurance, as a tax-free bucket (either during life or at death), is an excellent tool in the toolbox.
Peak 65 – We have been saying for years that 10,000 Americans turn age 65 every day. Well, this year is different. That 10,000 number will increase to 12,000 in 2024. 4.4MM people will turn 65 in 2024. The impact of the aging boomers is extraordinary in so many ways, but the peak of the aging of America is occurring THIS YEAR! Think of the opportunities for longevity planning with guaranteed income annuities, for generational wealth transfer planning (which is further highlighted by the previously discussed Sunsetting of the TCJA), Long Term Care needs, business owner exit planning needs … I could go on and on.
2024 Prediction – I am so bullish on finding ways to advise aging Americans and there are so many needs that are largely unadvised and unfulfilled. I believe that the aging of America is going to hit us hard this year and offer financial security professionals a massive opportunity to help consumers in ways we never thought possible, specifically around longevity hedging with income annuities and morbidity hedging with some form of Long-Term Care solution.
The Great Wealth Transfer – Do you know what happens when the largest generation in the history of mankind (The Boomers) fall in love and start to multiply? Generation Y, affectionately known as Millennials, happens. The Boomers have also created the largest amount of wealth in history. This Millennial generation is now larger than the Boomers, as some Boomers have begun to pass away, and they are going to be the beneficiaries of the largest wealth transfer ever in the next 20-30 years. While Millennials seem face down into their phones or tablets for everything, study after study shows that they want and need advice from a real person.
2024 Prediction – This is a massive opportunity, but we must meet them where they are when delivering financial guidance. They know a LOT more than their parents (the Boomers) did at their age because of the way they consume information and you had better be prepared for that if you are advising this market segment. The amount of wealth they are going to inherit is staggering and we must help them plan their own financial lives and prepare them to be good stewards of this extraordinary gift.
Global Unrest – We now have two very visible wars going on in the world and there are many smaller skirmishes that nobody even talks about. The risk of continued war and unrest is high, and it puts a tremendous amount of pressure on the American people to support democracy around the world. Of course, this comes at a cost. I have no predictions on war other than to move on to my next point, which is …
The National Debt – Yes, we will continue to be the bullhorn for democracy around the world and we will continue to send money to Ukraine and Israel and other less significant but important democratic countries, but how do we continue to pay for this generosity? At 33+ trillion dollars of debt, interest rates up and a Congress that cannot get anything done, we are headed for a train wreck, or at a minimum, a higher tax environment.
2024 Prediction – Who knows? But, as a country, we are burdening our children, grandchildren and great-grandchildren with some very dire economic realities or staring down the barrel at a massive revenue generation effort by the Federal Government – otherwise known as higher taxes. We just cannot continue to move in this direction. That said, the insurance industry has one of the most favorable tax solutions at our disposal if Congress does not take it away. This tool, life insurance, also serves to create and provide liquidity with very favorable tax treatment. We need to continue educating consumers and look for new ways to distribute our products, solutions, and services. I see continued change in insurance distribution with more and more players and technology vying to get into our space.
Politics and Regulation – Yes, it is an election year and even the best prognosticators don’t know what is going to happen. I have no predictions and even if I had an opinion, this would not be the place to voice it. The bottom line – there will be a lot of continued divisiveness in politics regardless of the outcome of the election…and with that comes political agendas. More taxes, less taxes, more regulation, less regulation. Right now, all the noise is about the Department of Labor Fiduciary Rule and like our Congress, the divisiveness on this issue is enormous. Calling how we get paid to advise clients and other advisors on financial security should not be referred to as “junk fees”. As I have discussed before, the conversation should not be about commissions versus fees. It should be about acting in the best interest of the client and making appropriate recommendations for risk management and protection products AND providing diligent ongoing reviews and customer service. We have a big battle ahead of us on this one. Also, we need to keep an eye on the Long-Term Care mandates currently being reviewed in any number of states, California being the biggest. We don’t want a repeat of what happened in Washington.
2024 Prediction – I am not bold or arrogant enough to predict anything here, but I will conclude with this … If you look at all my previous points, you will notice that it is a VUCA world (Volatile, Uncertain, Complex and Ambiguous) and we must recognize that reality in order to better guide our clients on the crazy journey called life. Making predictions as to where the market is going and what is going to happen to the economy, or in our politics, is a fool’s errand. More and more, in a post-pandemic era, we are recognizing the possible value of the lessons that Mother Nature taught us and continues to teach us.
I truly believe that the opportunities ahead of the financial security profession are endless and we are at a point in history, demographically, economically, technologically, politically, and otherwise, where the VUCA-ness of life is overwhelming to our customers. The sooner we recognize this and empathize with that reality, the better financial guides\coaches we will be to them. Only then will we be able to be true fiduciaries.
I want to thank everyone who was a part of AgencyONE’s journey during 2023 and encourage those of you whom we have the honor of serving (and all financial professionals) to recognize that your clients need your sage wisdom and guidance – today more than ever.