A.M. Best Special Report

Low Interest Rates Continue to Restrain U.S. Life/Annuity Results

Tapered Earnings

OLDWICK, N.J., August 21, 2015—The U.S. life/health (L/H) industry performed favorably in the first quarter of 2015, with a 54% increase in net income and a 5.8% increase in direct premiums written (DPW), compared with the prior-year period, according to a new A.M. Best special report.

However, despite the positive earnings in the first quarter and in recent quarters, persistent factors such as low interest rates and the slow-growth economy have resulted in a continuing trend of tapering earnings, and growth in DPW remains one of the top issues facing the industry.

The Best’s Special Report, titled “Low Interest Rates Continue to Restrain Life/Annuity Results,” notes the pension risk transfer market represents an area of potential premium growth going forward. This business can be somewhat unpredictable as to when premiums are received, although they tend to be generally high-dollar amounts that can have a significant impact on DPW. However, when interest rates do rise, the report states that this market could experience increased volatility. Interest rates have been projected to rise for some time, but there is increasing sentiment that the

Federal Reserve may raise interest rates as early as September 2015. A.M. Best will continue to monitor this evolving market, which can be appealing to companies with substantial resources interested in hedging large existing mortality books with longevity risk.

One positive note discussed in the report is that despite low interest rates, the industry so far has managed to limit the effects of spread compression on interest-sensitive products. The ability of insurers to lower crediting rates somewhat mitigates the effect of lower investment yields, making the risk of spread compression manageable. However, A.M.

when interest rates do rise... this market could experience increased volatility

Best expects that earnings from insurers that market annuities or other interest-sensitive products will decline if low interest rates persist.

Other notable first-quarter 2015 L/H results found in the report include as follows:

  • First-quarter 2015 net income totaled USD 12.6 billion, compared with USD 8.2 billion for the same prior-year period, primarily driven by a USD 4.6 billion swing in realized capital gains/losses.
  • Holdings in other invested assets, typically composed of Schedule BA assets, recorded the biggest quarterly change among investment allocations, increasing to 6.7% of total general account invested assets in first quarter 2015, up from 6.4% at year-end 2014.
  • Individual annuities decreased to USD 48.6 billion in first-quarter 2015, down from USD 51.5 billion in first-quarter
  • 2014, as low interest rates continue to impact fixed annuity sales and companies continue to moderate their risk exposure to annuities.
  • Ordinary life DPW at first-quarter 2015 increased 3.4%, suggesting perhaps that the implementation of Actuarial Guideline 48, which places significant limitations around the structure of XXX and
  •  AXXX captives, has not had a measurable negative impact on life sales.

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

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.