A.M. Best has announced its expectations for the U.S. life/annuity (L/A) market to build on a generally positive 2017. They see an overall growth in 2018 thanks in part to higher interest rates and continued demand from consumers for both protection and accumulation products.
A.M Best also indicated the industry is well positioned to benefit from interest rate hikes through new money investments and de-risked product liabilities written in the low interest rate environment.
It has been underlined that, despite continued volatility throughout the industry driven by a multitude of one-off transactions and events that negatively impact statutory results, the U.S. life and annuity insurance industry managed to post favourable operating results for 2017.
Full year statutory pre-tax net operating gains for the U.S. life insurance industry decreased 7.4% year over year, to $62.0 billion for 2017.
Favourable underwriting and prudent risk management offset some of the more macroeconomic challenges faced by (L/A) insurers. Additionally, hedging has become prominent, to help mitigate earnings and capital volatility driven by the macro environment and to manage risks inherent in embedded product guarantees.
A.M. Best, however, remained wary given the volatility in business lines that are more sensitive to interest rates and the equity markets, as well as lines subject to significant policyholder behaviour risks.
Although rates are forecast to continue to rise through 2018, continued pressures on spread-based businesses are also expected.
A.M. Best concluded that captive transactions are among the drivers of steady increase in the industry’s reinsurance leverage over the past five years, which continued in 2017. Reinsurance leverage increased another 12% even as companies reassessed their use of captivates and have even taken steps to move business back to non-captive entities. The increase is also attributed to companies that have acquired blocks of business they have moved to offshore non-statutory entities for tax efficiencies during the year
