Global ratings agency AM Best has confirmed that it is maintaining its stable outlook on the US life/annuity market segment for 2024, highlighting its strong liquidity and capital positions, robust annuity sales, as well as its slightly improved new money yields in a benign credit environment.
Best also revealed that the stable outlook is supported by the industry’s absolute level of capital, as well as robust levels of risk-adjusted capitalization.
The agency also explains that while there may be higher required capital due to premium growth, both capitalization metrics are expected to remain favorable.
Ed Kohlberg, director, AM Best, commented: “Strong capital buffers and the ability to maintain excess capital allow the industry to absorb financial market risks and potential changes in asset and liability valuations. This is expected to be bolstered as new capital is injected into the industry.”
Moreover, despite strong levels of risk-adjusted capital, there are also some major headwinds, according to Best.
Inflation is highlighted, due to the fact that it may continue to hamper profitability.
At the same time, Best noted that credit losses in commercial mortgages and collateralized loan obligations could wind up posing some risk, although the agency has not yet seen a material increase in impairments and defaults.
However, despite these headwinds, growth within the life/annuity industry continues to be strong, amid 10 straight quarters of year-over-year individual annuity premium growth.
This substantial growth is mainly attributable to ongoing equity market declines and rising interest rates, which ultimately has led to solid growth for fixed rate deferred annuity sales and fixed indexed annuity sales.
In addition, growth across the annuity market is said to have created increased competition as many new organisations have entered into the space.
Best noted that it is concerned that annuity growth will be accompanied by an increase in surrender benefits.
Whilst, surrenders topped $100 billion in the second quarter of 2023, they remain low as a percentage of annuity premium growth.
Jacqalene Lentz, director, AM Best, said: “Companies are proactively looking to mitigate the risk and disincentivize surrenders. In many cases, companies are attaching market value adjustments, or MVAs, to surrender charges, so that if yields are higher at the time of withdrawal than when the contract was purchased, the MVA increases the surrender charge.”
