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Best's Market Segment Report: U.S. Life/Annuity Insurers on Solid Ground, But More Rapid Technology Advancement Needed to Keep Footing Secure
[February 09, 2018]

Best's Market Segment Report: U.S. Life/Annuity Insurers on Solid Ground, But More Rapid Technology Advancement Needed to Keep Footing Secure


The U.S. life/annuity (L/A) industry in 2017 was characterized by strong balance sheets, solid earnings, focused business profiles and ongoing enhancements to enterprise risk management programs. However, according to A.M. Best's 2018 Review/Preview special report, the industry still remains plagued by macroeconomic and regulatory factors, as well as internal forces such as lackluster sales, rapidly evolving technological requirements and changing consumer preferences and behavior.

The Best's Market Segment Report, titled, "U.S. Life/Annuity: 2018 Review & Preview," states that the industry's statutory pretax operating earnings were favorable through third-quarter 2017, totaling $48.3 billion, significantly higher than the $32.2 billion recorded in the same period in 2016. Both periods were significantly impacted by reinsurance activity. Capital and surplus grew by $19.4 billion since the start of the year, reaching $414.7 billion through third-quarter 2017. Despite these positive trends, capitalization has been qualitatively diminished by the ongoing use of captives, permitted practices, surplus note issuance and other forms of redundant financing, although at the holding company level, financial flexibility and liquidity remain sound.

Although the industry saw some upward movement in interest rates in 2017, generally low inflation and strong global economic metrics kept the longer end of the 10-year yield curve relatively flat and further pressured companies with more interest-sensitive profiles such as universal life and fixed annuity products. Sales of mainstream L/A products continued to struggle in 2017 nd may be challenged in the coming year as well.

Individual annuities, which account for over a quarter of total L/A direct premiums written (DPW), fell to $203.1 billion in 2016 from $213.2 in the previous year, and at third-quarter 2017, stood at $140.0 billion. Anticipated interest rate hikes in 2018 may create a tailwind for insurers if it leads to an eventual steeping of the treasury yield curve , which may make fixed annuities more attractive and allow insurers to attain more favorable interest rate spreads.

Still, A.M. Best expects another challenging year for those insurers seeking higher asset yields to maintain operating profitability and manage spread compression. Increased volatility across economic and regulatory fronts, which includes the potential for a correction in the equity and credit markets, is a primary reason behind A.M. Best maintaining a negative outlook on the L/A industry for 2018. Insurers' focus will remain on core fixed income, private placements and collateralized mortgage loans, and because many L/A carriers have strong credit expertise, investing in collateralized loan obligations also likely will remain popular.


A.M. Best believes every aspect of L/A insurers' business model must be updated and kept current with technology. Such moves go directly against an industry that is characterized as being plodding and slow; however, the industry remains hamstrung by too many antiquated front- and back-end systems, which makes leveraging the significant amount of data many carriers have already amassed difficult. Current and future advancements will change the industry at an unprecedented pace, and A.M. Best expects this technological revolution to drive much-needed consolidation.

To access a copy of this special 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=270379.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2018 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.


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