income planning

Many Headwinds

Life Insurers Remain Focused on What They Can Control

OLDWICK, N.J., January 31, 2017 — Many post-presidential election signs appear favorable for U.S. life/annuity (L/A) insurers in 2017: rising rates, increased potential for lower taxes and reduced regulatory hurdles.

However, according to a new A.M. Best special report, L/A insurers still need to remain focused on the issues that have plagued the industry in recent years as they remain more directly in the industry’s control.

The 2017 Review & Preview Best’s Special Report, titled, “Many Headwinds, But Life/Annuity Insurers Remain Focused on What They Can Control,” notes that A.M. Best revised its outlook for 2017 on the L/A industry from stable to negative. The revision is reflective of an industry that does not look vulnerable to any single shock, but is susceptible to a multitude of pressures that raise operational risk and is placing increasing time constraints on senior management.

In 2016, economic headwinds, evidenced through low interest rates, continued to impact both sides of the balance sheet through increased credit and liquidity risks, lower investment portfolio returns and increased reserving. Robust equity markets and benign credit markets partially have offset some of this pressure, and many companies have taken advantage of lower financing costs to prepay near-term debt maturities, resulting in modest short-term increases to financial leverage.

The report states that in the aggregate, asset and liquidity risks for the L/A industry has increased as a result of low returns and a benign credit environment. L/A insurers continue to take an aggressive stance in reallocating premiums and maturing investments to tilt portfolios toward industry views on interest rates and credit quality. This has led to further investment into private placement holdings, continued interest in NAIC-2-rated fixed income securities and structured securities—namely collateralized loan obligations (CLOs).

What’s ahead for Fiduciary Rule?

The significant near-term regulatory changes, such as principles-based reserving or the U.S. Department of Labor’s pending fiduciary rule, remain largely the same as last year, but the biggest unknown for the L/A industry is which of these regulatory changes will remain intact under the new Republican administration, or whether some or all will be either materially delayed, overhauled or repealed altogether.

Overall, relatively stable and sufficient risk-adjusted capital ratios have sustained companies through an extended period of low top line growth and modest returns. Companies continue to improve their product pricing to reflect more realistic assumptions for interest rates, lapses and policyholder behavior in general.

Going forward, A.M. Best notes the importance of focusing on those issues in the industry’s control: modernization of the business model through improved systems and data analytics to improve underwriting and profitable top line growth, managing through an uncertain and potentially volatile global economic and regulatory environment and strategic decision-making for asset allocation and business profile. A.M. Best also expects that the prospect of disruption from financial technology/insurance technology companies likely will drive highly strategic-focused merger and acquisition activity.

To access a copy of this report, which also explores the industry’s overall operating performance, invested asset allocations, shifting distribution strategies, potential growth opportunities and life reinsurance trends, please visit here.

In addition, to view an interview with the Senior Managing Director and Chief Rating Officer Stefan Holzberger discussing the L/A sector, visit here.

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