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A.M. Best Benchmarking Analysis Shows Most U.S. Life/Annuity Insurers Well-Capitalized; Impact from Methodology Changes Likely to Be Minimal
[October 09, 2017]

A.M. Best Benchmarking Analysis Shows Most U.S. Life/Annuity Insurers Well-Capitalized; Impact from Methodology Changes Likely to Be Minimal

An A.M. Best analysis of the U.S. life/annuity (L/A) industry under the rating agency's revised Best's Credit Rating Methodology (BCRM) and its new building block approach revealed that approximately one-third of the rated population had the strongest category of balance sheet strength.

The Best's Special Report, titled "U.S. Life/Annuity Industry - Building Block Approach Confirms Well Managed Companies Continue to Stand Out," states that A.M. Best anticipates that fewer than 5% of its current ratings will change owing to the adoption of the building block approach in the new BCRM. The assessment of rated L/A insurers has generated benchmarking statistics, which are detailed in this report; however, none of these companies have been through a formal rating committee process under the new BCRM.

The primary quantitative tool used to evaluate balance sheet strength is Best's Capital Adequacy Ratio, which helps determine whether a company's capitalization is appropriate; however, A.M. Best takes all of the balance sheet components into consideration, as the BCAR itself is not the sole determinant of the balance sheet strength assessment. Overall, more than 75% of L/A companies in A.M. Best's testing environment were assessed at strong, strongest or very strong, revealing well-capitalized companies and overall healthy balance sheets that support existing asset and liability risks, as well as anticipated new business growth.

Along with balance sheet strength, the key pillars A.M. Best uses in its credit analysis are operting performance, business profile and enterprise risk management. Operating trends, as measured by a five-year return on equity, remain strong, although just one-fifth of rated L/A companies recorded a median five-year average net yield higher than 4.5%, which A.M. Best considers adequate in its assessment of operating performance. This current investment performance reflects the continued decline in overall portfolio yields being experienced in the industry given the prolonged low interest rate environment.

Of the rated L/A companies, 75% were considered to have neutral or limited business profile assessments, a reflection of limited market positions due to factors such as lack of geographic or product line diversification, limited control of distribution, high levels of competition with low barriers to entry and higher product risk. Approximately the same percentage of L/A companies were found to have appropriate enterprise risk management frameworks in place that are in line with the size and complexity of each company's operations.

"By focusing on capital preservation and slow and controlled growth, life/annuity companies can minimize volatility and maintain financial stability," said Ken Johnson, a senior director in A.M. Best's life/health ratings division. "Regardless of organizational structure, well-managed companies stand out from the competition."

Johnson and Edward Kohlberg, an A.M. Best associate director, will present the findings of this report on Tuesday, Oct. 10, 2017, from 7:30 a.m. to 8:15 a.m. (EDT) at the 2017 American Council of Life Insurers (ACLI) conference, to be held Oct. 8-10 at Loews Sapphire Falls Resort in Orlando, FL.

To access a copy of this special report, please visit .

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

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.

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