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ADVERTORIAL: Outlook Remains Stable for Life and Annuity Segment

Advertorial:
Outlook Remains Stable for Life and Annuity Segment

Author

Jason Hopper
Associate Director Industry Research and Analytics
AM Best

AM Best has held a stable outlook on the U.S. life and annuity segment since late 2021, when it was revised from negative. For 2024, the continuing stable outlook factors in life and annuity writers’ healthy balance sheets, improved new money yields, product development that better fits policyholder needs and favorable growth trends.

Life and annuity companies are maintaining their focus on operational and technology improvements to improve the customer experience and enhance distribution. In recent years, industry life sales saw favorable growth due to the general public’s growing interest in life insurance products, particularly during the COVID-19 surge. Although the industry continues to grow, the rate of growth now has slowed down.

Meanwhile, annuity sales have emerged as a bright spot for the industry (Figure 1), driven by rising interest rates that have allowed insurers to offer more attractive crediting rates.


Figure 1. US Life and Annuity — Net Premiums Written by Product

 

According to LIMRA, total U.S. annuity sales in the first half of 2024 set a new record for the first six months of a year since it started tracking sales. As noted in a recent Best’s Market Segment Report, “US Life/Annuity Insurers Stay the Course as They Prepare for 2024 Uncertainty,” the demand for guaranteed income products in an uncertain economic environment is fueling much of this growth.

At the same time, annuity surrender benefits reached at least a five-year high of $126.8 billion in first quarter 2024. Outside of the first quarter of 2023, surrenders have topped the $100 billion mark each quarter since fourth quarter 2022, according to the Best’s Special Report, “Annuity Surrenders Up Through 3Q23, Beating Premium Growth.” While growth in annuity premiums given the rising interest rates is a driver, the rate hikes also increase the potential for disintermediation. Additionally, runoff companies, or those that focus on block acquisitions rather than organic growth and therefore cannot replace the business being surrendered, are most likely to experience a shrinking asset base as maturing bonds may be used to cover additional surrenders instead of being reinvested.

Overall, the life and annuity segment demonstrated resilience in 2023, with statutory capital and surplus increasing by 5 percent over the previous year to $508.3 billion. Despite a modest drop through first quarter 2024, this growth in capital, coupled with high single-digit compound growth from 2019 through 2021, has positioned insurers favorably to weather potential economic headwinds.

The industry's investment landscape also has evolved in response to the changing interest rate environment. Many insurers have extended asset durations by purchasing higher-rated bonds with attractive coupon rates to improve asset-liability matching. However, concerns persist about certain asset classes, particularly structured securities and commercial real estate investments.

Life and annuity insurers continued to increase allocations to commercial mortgage loan portfolios in 2023, but problem loans, including those 90 days delinquent, still rose sharply, according to Best’s Market Segment Report: “Mortgages 90 Days Overdue Double in 2023.” Allocations to mortgage loans last year expanded by more than 6 percent to $734.2 billion, with mortgages now accounting for 13.5 percent of the segment’s investment portfolios. Office properties accounted for more than a quarter of overdue loans, mainly reflecting the impact of the pandemic and more people working remotely either full time or on a hybrid schedule. AM Best believes this trend is likely to continue until the market becomes more stable as a result of interest rates and loan maturity.

Another leading industry topic is the increasing market share of private equity- and asset-manager-owned insurers. They now represent nearly 10 percent of the total life and annuity industry by admitted assets, as of year-end 2023 (Figure 2).

 

Figure 2. US Life and Annuity, Private Equity/Asset Manager-Owned Insurers — Admitted Assets

 

These entities have demonstrated strong premium growth, particularly in the annuity business; however, questions remain about their long-term strategies and potential exit plans.

Enterprise risk management remains crucial as insurers face evolving challenges. Cybersecurity has emerged as a critical concern, with several insurance companies falling victim to cyberattacks in recent years. A robust enterprise risk management framework is critical to help an insurer navigate risks associated with market volatility, geopolitical tensions and emerging technologies.

Regulatory and accounting changes continue to shape the industry landscape. The implementation of long-duration targeted improvements for generally accepted accounting principles (GAAP) reporting introduced new complexities for public companies. Additionally, the National Association of Insurance Commissioners (NAIC) has adopted changes to life risk-based capital requirements for certain structured securities.

Looking ahead, strong capital positions and favorable liquidity profiles will provide a solid foundation for the life and annuity segment. But economic uncertainty and potential market volatility could test insurers' resilience. The need to attract talent amid ongoing labor shortages and navigate evolving technology advancements while maintaining robust risk management programs will be key focus areas.

Research such as is highlighted above is available through a full news service level subscription to Best’s Insurance Reports. A subscription provides access to valuable analysis of property/casualty and life/health companies in the U.S. and Canada, as well as life and non-life companies outside the U.S. For further information, visit www.ambest.com/sales/bir.

For more information and to request a demonstration:

US/Canada: +1 908 439 2200, option 5 • sales@ambest.com

Europe/Asia-Pacific: +44 20 7397 0290 • europe.sales@ambest.com

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