CONTACTS:
FOR IMMEDIATE RELEASE
OLDWICK - FEBRUARY 28, 2019 08:27 AM (EST)
Despite a recent change in AM Best’s life/annuity (L/A) market segment outlook to stable from negative, clouds remain on the horizon as 2019 began with an usual mix of uncertainty, according to AM Best’s 2019 Review/Preview market segment report. There is potential for a global economic slowdown owing to a prolonged trade/tariff war, and while the industry has benefited from an easing in regulatory oversight, changing political dynamics could slow down or even reverse some of these gains.
The Best’s Market Segment Report, titled, “U.S. Life/Annuity: 2019 Review & Preview,” states that the L/A segment’s profitability was up in 2018 on a GAAP basis, as modest growth, coupled with an increase in investment income and further operating efficiencies, helped performance. However, statutory results were less favorable due to capital strain from the growth of certain product lines and continued noise from significant reinsurance transactions.
The L/A industry’s statutory pretax operating earnings were favorable through third-quarter 2018 at $45.8 billion, but lower than in the same period in 2017 ($50.6 billion), driven primarily by higher surrender benefits and increases in reserves (including large reinsurance recaptures) and significant increases in reserves for long-term care blocks driven by assumption changes. However, headwinds to earnings growth persist, including diminished investment portfolio yields, increased technology spending and growth challenges due to the mature ordinary life and accident and health insurance markets. Premiums increased in 2018, driven by an improvement in annuity sales, as the drag from the U.S. Department of Labor’s Fiduciary Rule changes has diminished. Fixed index annuity sales also remain very strong.
Capital and surplus has grown to just $1.4 billion since the start of 2018, reaching $411.3 billion by September, due mainly to the reduction in deferred tax assets as a result of U.S. tax reform. Slight increases in interest rates also have led to net unrealized losses, while shareholder dividends have increased slightly since last year, with less contributed capital.
The life insurance segment continues to build up its balance sheet, strengthened by improvements in risk-adjusted capitalization and enterprise liquidity. Overall asset allocations remain consistent, with bonds at 73%; commercial mortgage loans at 12%; Schedule BA (non-traditional) at 6%; policy loans at 3%; public equities at 3%; and other holdings at 3%. However, these statistics mask an ongoing trade-off in liquidity, as investment-grade corporate bonds were exchanged for either collateralized loan obligations or private placements.
At this point, AM Best believes the industry may feel some capital or liquidity pain in its investment portfolios owing to negative rating migrations rather than mass impairments stemming from failing sector impacts. Separately, companies with expertise in classes such as commercial mortgage loans, or those working with third-party managers with that expertise, will likely fare better than those that do not.
To access a copy of this market segment report, which also includes a look at the regulatory issues impacting the L/A industry along with outlooks on individual L/A sectors, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=283196 .
To view a video interview with Managing Director Kenneth Frino and Director Thomas Rosendale on this report, please visit http://www.ambest.com/v.asp?v=reviewpreviewlife219 .
AM Best is a global rating agency and information provider with a unique focus on the insurance industry.