A.M. Best Special Report

Macroeconomic Factors Continue to Pressure Publicly Traded U.S. Life/Annuity Insurers

OLDWICK, N.J., April 15, 2016—Stock prices for publicly traded U.S. life and annuity (L/A) insurers rebounded slightly in fourth-quarter 2015 with a 2.0% increase following a marginal decline in the previous quarter, according to a new A.M. Best special report focused on the stock price performance of nearly two dozen L/A companies.

The Best Special Report, titled, “Macroeconomic Factors Continue to Pressure Publicly Traded Life/Annuity Insurers,” states that despite the favorable aggregate stock price performance in fourth-quarter 2015, the 23 L/A insurers followed in this report still posted a 3.0% decline for the year.

The downturn in performance for the L/A segment has been largely driven by macro-economic factors, partially offset by noteworthy company-specific announcements, including mergers and acquisitions.

The Federal Reserve’s (Fed) forecast for 2016, as reported in December 2015, indicated that economic activity will continue to expand at a moderate pace, labor market indicators will continue to strengthen and inflation will remain below its target of 2%. Additionally, the Fed increased the Federal Funds Target Rate by 25 basis points in December 2015 for the first time in almost 10 years and indicated that any future rate increases would be gradual and data-dependent.

Manulife & Sun Life lead revenue declines

despite the favorable aggregate stock price performance in fourth-quarter 2015, the 23 L/A insurers followed in this report still posted a 3.0% decline for the year

Revenue for the L/A population in this report declined year over year by 8.5% in 2015.

With just nine of the companies reporting an increase in revenues in 2015, the decline largely stemmed from the two larger Canadian companies, Manulife Financial (Manulife) and Sun Life Financial (Sun Life), which reported the largest revenue declines of 38.2% and 25.2%, respectively. National Western Life (-16.8%) and Fidelity Guaranty Life (-13.9%) were the other companies that reported double-digit percentage declines.

Although most L/A companies in the first few months of 2016 have faced many of the same challenges present as when they entered 2015, there is a heightened sense of urgency for owners, shareholders and policyholders to ensure companies are not continually increasing risks. The economy continues to pressure not only investment portfolio returns, but also the profitability of many products, both spread-based and those with underlying long-term interest rate assumptions.

A.M. Best believes the capital markets are likely in the early stages of a reversal of the long benign credit environment and that the L/A industry is poised to absorb what could be a sudden drop in credit quality and liquidity of even its stronger investment grade holdings.

Although the industry professes itself as a buy-and-hold industry, the financial crisis of 2007-2008 showed the importance of liquidity for insurers. In addition, pressure is already being felt in the corporate bond market through the exposure to energy-related business, as evidenced by revenue and investment income declines at Manulife and Sun Life.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=248120.

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