The majority of U.S life/annuity companies posted favourable operating results in 2018, according to A.M. Best, but statutory pre-tax operating gains declined by 25%, the largest drop in five years.
The rating agency observed that pre-tax operating earnings for the sector declined from $63.7 billion in 2017 to $47.8 billion in 2018.
It attributed the decrease to a number of large one-off transactions, as well as company-specific events at large organisations.
After-tax earnings fared better, with a decline of just 14% to $44.4 billion last year due to a 75% reduction in income tax, owing to U.S tax reform.
Margins in the life/annuity sector were also dampened by a decline in net investment gains, analyts note, while headwinds to earnings growth also persist due to lower investment returns, rising tech spending, mature ordinary life and accident and health markets, and more intense competition.
In contrast, premiums increased and annuity sales improved in 2018 due to diminished drag from the Department of Labor’s fiduciary rule changes, A.M. Best said.
Group annuity premiums grew by 9%, bolstered by continued growth in pension risk transfer transactions during the year, and fixed index annuity sales also were very strong for the industry.
Additionally, favourable underwriting and prudent risk management have helped to offset the life/annuity industry’s macro-economic challenges, as a realignment of product portfolios resulted in improved statutory and GAAP operating profitability.
Hedging also remains prominent to help mitigate earnings and capital volatility and to manage risks inherent in embedded product guarantees.
However, A.M. Best cautioned the sector on the volatility in business lines that are more sensitive to interest rates and the equity markets, as well as lines exposed to significant policyholder behaviour risks that could require further reserves.
