From Normal to Unchartered Waters
Introduction
Welcome to 2025 for what seems to be a new year and a new world. There is certainly a lot happening. With all that is going on in the world, I am going to employ a bit of a different approach to this year’s letter. I normally try to focus on the previous year with sprinklings of relevant updates for the current year. With the whirlwind of all that is happening in 2025 and the impact on the financial markets, it is a bit hard to just cut things off at year-end 2024.
One year ago, at this time, I wrote to you about a “return to normal.” I was predominantly referring to a return to a 4.25% interest rate on the 10-year U.S. Treasury Bond (10Y UST) and a post-Pandemic return to improvements in life expectancy. The reason I classified these as “normal” is because the long-term average of the 10Y UST yield is 4.25% dating back to the Civil War years in the 1860s and, over the past century, we have become accustomed to constant improvements in life expectancy due to the discovery of new drugs and medical procedures that save and improve lives. My message was the Pandemic had moved to an endemic stage; low interest rates were over, and the period of declining life expectancy was over as well. We had mostly returned to normal.
As we looked at things in 2024, the lingering aspect of not normal was the inverted yield curve, where short term interest rates were much higher than longer term interest rates, usually a sign to economists of an impending recession. This dynamic had puzzled economists because it lasted a record 783 days from 2022 to 2024 with no recession emerging. Ultimately, the Federal Reserve began to lower the Federal Funds Rate in 2024, which brought short-term rates down while longer term rates rose a bit due to higher expectations of inflation. With that, a normal, upwardly sloping yield curve emerged.
The other positive story we spoke about in 2024 was the strength of the stock market and the impact that it had on consumer confidence via the “wealth effect”. The market did well all year and the S&P 500 ended the year with a 25% total return. The 2023 to 2024 two-year period of 20%+ returns is one of only a handful of back-to-back years where markets gain more than 20% each year, a dynamic that has happened only 9 times in the past 100 years.
OK, so the question is – why does this matter to me as a Member of SBLI? Mortality, as measured by improvements in average life spans, the financial markets (interest rates & stocks), and the economy in general are all part of a big puzzle that the management team at SBLI needs to monitor, rationalize and manage too. As a life insurer, we like to promote long healthy lives, which is good for our members and good for our Company. Interest rates impact all things in our members’ personal lives – mortgages, deposit rates, car loans, credit cards, student loans, etc. Plus, interest rates impact what levels SBLI can invest its balance sheet that supports the outstanding policies on its books. In this regard, SBLI’s wishes would align with those who have savings or investment accounts where the higher the interest rate the better; contrary to those seeking to buy a home, car, or other financed type item.
The other key factor that we track is consumer confidence. Since the purchase of life insurance is a discretionary purchase, there is a high correlation between consumer confidence and life insurance purchases. When the economy is doing well and the stock market is at or near record levels, the “wealth effect” takes hold. Consumers gain confidence and spend more freely because they feel wealthier. That was the case for 2023 and 2024, two great years for the stock market and correspondingly high levels of consumer confidence. As you all know, now that we have entered 2025, the stock market and interest rates have both become more volatile and as one would expect, consumer confidence has had a dramatic decline, dropping to its second lowest level ever recorded dating back to 1952 when the index was created. In turning the calendar from 2024 to 2025, we have quickly moved to unchartered waters.
On top of the big items mentioned – mortality, financial markets, and the economy, we also have teams that are focused on managing the Company’s sales, operations, and technical resources in order to provide the best customer experience possible. As I always tell the teams, this is a constant evolution. Things are always changing, and our competitors are always coming up with new, innovative ideas for improving how they service their clients. We must keep up with the competition and work to stay relevant with our current Members and future Members as well. The lifeblood of a life insurance company is predicted by always bringing in new lives and building what we call our in-force block (policies outstanding).
On all of these aspects of running the Company, we have multiple scorecards, reports, analysis, and dashboards to measure progress and success. We use those tools to report to the Board of Directors, the rating agencies, and the Division of Insurance (DOI). We provide an annual review for the DOI and are examined by the DOI every five years for structured financial and market conduct examinations. We recently held our annual review with the DOI and we are currently in the midst of the five-year exams. From a rating agency perspective, we are rated “A” (Excellent) by A.M. Best and “A-” by S&P. For both rating agencies, we will compile a lengthy presentation that covers all aspects of the Company’s finances and operations. We then meet with the rating agencies to present and discuss our performance. The rating agencies then bring the Company to a Rating Committee and the result is our annual assigned rating. As members, you should take comfort in our strong ratings.
As we look back on 2024 and move into 2025, I will provide my perspective on what is continuing to normalize and other aspects that have now moved into unchartered waters. In each case, I will assess how I believe SBLI will be impacted
Mortality
As a result of the Pandemic, life expectancy from birth suffered three years of declines in the United States, the first such declines since the Spanish Flu in 1918 and World War II in the 1940s. The declining cycle was broken in 2023 when numbers turned upward again. In 2024, it was reported that even more improvements had emerged. I will remind you; life expectancy can be measured in multiple ways. Life expectancy at birth measures how long a baby born today could expect to live if all current expected causes of death remain consistent over that baby’s life. Looking back over the past three years, the trend is 76.4 years in 2022, 77.5 years in 2023 and 78.4 years in 2024. The most current 78.4 years result compares to 78.8 years in 2019, prior to COVID. The absolute record year is 79.7 years for 2017. While life expectancy has retraced the losses due to COVID, it is still lagging the record, and the decline has been attributed to opioid-related deaths and elevated levels of suicide. Also, while the global 78.4 years result is good, the divergence between males and females continues to grow. Males are 74.8 years and females are 80.2 years in the most recent tallies. The divergence is thought to be caused by higher percentages of opioid deaths and suicides concentrated in the male population.
When SBLI’s actuaries price our products, they take all of these trends into consideration. They then must balance life expectancy from birth with the life expectancy of those already alive, a more dynamic model. As one ages, they pass through ages of the various potential causes of death. For instance, 20-year-olds are at a higher risk of car accidents than 30-year-olds or 40-year-olds, statistically. Life insurers such as SBLI follow price-based mortality trends focused more on life expectancy as it relates to those already alive. It is a complicated formula that tries to assess the mortality risks of all new clients. The life expectancy of those already alive is more dynamic and is more prone to display the benefits of mortality improvements. All of this is relevant to you as current members because you are already part of the in-force policies. Management’s goal is to add new policies that have strong mortality characteristics that add value to the total mortality profile of the Company.
SBLI’s mortality experience for 2024 was slightly higher than expected in our 2024 budget, but within the actuarial long-term expectations of death claims.
Financial Markets, the Economy, and Interest Rates
Financial Markets
When I look at the stock market, my default index is the S&P 500 Index. It represents 500 of the largest companies in the United States and 80% of the market capitalization (total value) of all stocks traded on U.S. indices. It is considered a bell weather of how the U.S. economy is doing. For 2024, the S&P 500 Index achieved a rare feat – two successive years of over 20% returns. It was also important that it did so with much broader participation than 2023 when all the gains were concentrated in the “Magnificent 7”, the country’s leading tech stocks.
As discussed last year, SBLI and the life insurance industry at large do not have high percentages of funds invested in the stock market; but we do track the stock market because strength in the stock market creates investor optimism which, in turn, creates a “wealth effect.” The “wealth effect” contributes to consumer confidence and encourages consumers to spend more freely on discretionary purchases, with life insurance being a discretionary purchase. The surge in stock values in 2023 and 2024 drove high levels of consumer confidence and discretionary spending surged.
Between funds invested in 401(k) accounts and traditional stock accounts, roughly 62% of the U.S. population has some exposure to stocks. With values running high in 2023 and 2024, some 162 million Americans participated in the stock market with a heavy concentration of funds in S&P 500 Index Funds. These individuals largely enjoyed the most recent stock market experience.
Now, as we have moved into 2025, the winds have changed. The Dow Index peaked in late December at 45,045. The S&P 500 Index peaked on February 19, 2025, when it closed at 6,144. The Dow is now 39,142 (4/17/25), down 13.1%. The S&P 500 is 5,283 (4/17/25), down 14.0%. These declines and the associated volatility of stocks have permeated all the news stations and personal finance sites. The markets definitely have investors’ attention, young and old. It was no surprise that consumer confidence would be impacted. However, it was surprising that the consumer confidence level declined to the second lowest level on record dating back to 1952.
The stock market will continue to take its lead from corporate earnings, fiscal policy, monetary policy, and economic cues. Right now, the noise from fiscal activities has become quite loud. The monetary activities governed by the Federal Reserve are largely on the sideline. The economic indicators are rapidly turning softer, which is expected to negatively impact corporate earnings. That in turn will keep pressure on stocks. However, one change on the fiscal side or any type of engagement from monetary policy could turn things around quickly. That is why the stock market is so hard to predict.
The Economy
The performance of the U.S. economy in 2024 was an extension of the 2023 economy with a few cracks starting to emerge. The long-awaited decline in inflation came, which allowed the Federal Reserve to lower the Federal Funds Rate 3 times starting in September. With the Feds rate cuts, short-term rates came down and long-term rates rose a bit due to inflation expectations. The normal upwardly sloping yield curve returned. The labor markets remained strong with low unemployment and decent job creation. Economic activity continued to expand, albeit at a moderate pace.
Concerns for the economy in 2025 began to emerge with the Federal Reserve in December. They had two rate cuts completed for September and November, but employment numbers remained stronger than expected and inflation proved to be a bit stickier with the Fed’s preferred gauges rising in December, rather than easing as expected. Despite these developments, the Fed proceeded to cut the Federal Funds Rate by 25 basis points and in its post
meeting comments, concerns were raised about the inflationary risks associated with trade policy and immigration policy.
With respect to trade policy, the deafening noise is coming from the tariff’s announced on April 2nd. In essence, the announcement was tariffs on all trading partners to create “fair” bilateral tariffs. This is a major departure from the role the U.S. has played since World War II. Since WWII, the U.S. has been viewed as the economic engine of the world. The saying always went, “If the U.S. economy catches a cold, the world catches the flu.” The U.S. dollar is the number one currency used across the world, the “reserve currency.” All other countries own dollars and buy U.S. Treasuries to support and settle economic activity. Oil universally trades and settles in U.S. dollars. With the tariff announcements, the dollar is weaking as other countries question the future commitment of the U.S. dollar policy. Plus, they have become net sellers of U.S. Treasuries. These are not good signs. The tariffs are a tax and taxes are inflationary. That fact coupled with less demand for U.S. debt and long-term interest rates are at risk of going up. Higher interest rates will slow the U.S. economy and further impact the housing market.
Similar to my comments surrounding the wealth effect on purchases of life insurance, consumers’ feelings, and opinions of how the broader economy is doing, has an impact on life insurance product purchases as well. A growing economy with low levels of unemployment are conducive to new life insurance purchases and continued payment from existing policyholders. That appears set to be challenged for the near future.
Interest Rates
The Federal Reserve shifted gears in 2024 and moved from a tightening program of raising rates in 2023 to an easing program of lowering rates. This was a natural transition based on the direction of economic indicators. The expectations were for the economy to slow early in 2024 and for inflation levels to drop. Both of those dynamics were slower to materialize than expected.
As we move into 2025, the interest rate picture has become much more complicated and uncertain. The Federal Reserve is concerned about the inflationary impact of tariffs and immigration policy. As previously mentioned, tariffs are a tax and taxes are inflationary. On the immigration side, the deportation programs are sending thousands back to their countries. Many small business owners have expressed concern that replacing the labor domestically is going to be significantly more expensive, inflationary. The Fed’s counterparts across the globe are cutting rates and the current administration would like the Fed to cut rates too. But the Fed is trying to maintain its independence and taking a wait and see approach on the impacts of current policies. This will be a political and economic tug of war in 2025 between the administration and the Fed.
All of these pieces of the puzzle moving around so much have complicated our investment department’s activities. Like “savers,” SBLI enjoys higher interest rates, especially after the long 15 year stretch of historically low interest rates. As I have said in the past, those low rates will haunt SBLI and the life industry for years to come while we wait for our $3+ billion portfolio to rest higher. However, the relief on our portfolio over the past two years has been a welcomed reprieve. Relief from investment income over time could allow for lower pricing, greater product diversification, enhanced services, and overall enhanced business strength.
Systems and Operations
The technological world has been changing at light speed and our IT staff have done a commendable job of keeping up. We are navigating the rapid advancements in AI Technology and all of the promise it poses for the future. We will continue to strive to be on the “early adopter” side of this because not doing so puts the Company at risk of falling behind its competitors and unable to meet existing and new customer expectations.
With the world focused on AI and all it can do, there is a tendency to not talk about other IT needs. We are avoiding that trap and proactively looking at our core technology platforms and all associated satellite systems as well. Our core policy administration system was developed in 2002, turned on for new business in 2003 and had existing business converted between 2004 to 2007. For us, it is a 23-year-old system. Our prior system was built in the early 1970s and lasted until 2002, roughly 30 years. To be honest, we rode that horse too long and by 2002 needed a new system. With rapid changes in the IT world, we are evaluating a new platform and upgrade of satellite systems as well. Our goal is to do this in an orderly fashion to avoid placing ourselves in the must-convert situation we found ourselves in way back in 2002. This will be a large, multi-year endeavor but will leave us in a position to best serve all the needs of all our customers, new and old.
Conclusion
SBLI operates in a complex world. As I stated with my theme for this year, I felt as though we had returned to some sense of normal in 2023 and 2024. In 2025, we have quickly entered choppy and unchartered waters. The changes coming from tariffs are the largest changes to world trade policies in 80 years, the end of World War II. The impacts and outcomes are yet to be known. I would say our focus over the past five years tilted towards mortality from the Pandemic and the requisite low interest rates prescribed by the Federal Reserve. Our focus has shifted to the economic and interest rate impacts of the current environment.
In my opening Introduction, I classified SBLI as a big puzzle, a complicated puzzle. We are impacted by changes in mortality, the stock market, the economy and interest rates. All of these things are currently in flux or have been over the past several years. The management team has navigated these challenges well and is prepared to navigate the latest challenges as well. In doing so, we are cognizant we are responsible for our oldest policyholder who has been with us since 1930 and our 29,605 new members who purchased policies in 2024.
When I look at our members new and old, I am reminded of the fact I have been a policyholder/member for 38 years. I grew up in Lewiston, Maine, and came to Massachusetts to go to Bentley College. From the instant I moved to campus, my grandfather insisted that I get a Massachusetts address and buy a life insurance policy from SBLI. As a college student, it took a couple of years for me to follow orders, but I became a policyholder in 1987, like my mother and grandfather. When SBLI turns 120 years old in 2027, I will be a 40-year policyholder, one-third of the Company’s history. My mother was a policyholder from 1953 to 2012, and my grandfather was from the 1920s until 1987. So, when I write to you, it is as your CEO and as a policyholder/member with a long-term vested interest in this Company; the same as you.
My closing paragraph for you remains the same. In the end, our commitment to you, our SBLI Members, is for the management team and the Board of Directors to manage SBLI to the best of our abilities no matter what the issue of the day is. No matter what the challenge, we strive to meet it and persevere. For our members, it has become normal for SBLI to exist as a company as it has since 1907. Our collective goal is for that to remain normal for the next 100 years and beyond.
Jim Morgan, President & CEO