Low rates and low profits

By Andrew Rickard | May 05 2016 10:10AM

A. M. Best has released a special report examining the US life and annuity industry’s after-tax results for 2015. The ratings agency notes that earnings continue to be below historical levels, and predicts that low interest rates and lower profits will continue into 2016.

In its Year-End 2015 US Life/Annuity Statutory Results Review, A. M. Best points out that the American life and annuity industry managed to generate favourable results despite the pressure that faltering stock markets and low interest rates put on investment yields. Full-year statutory earnings for the U.S life insurance industry increased by 6.7% year-over-year, which remains below historic levels despite a steady increase in invested assets and capital. The report also notes that, given the mature nature of the industry, there has not been substantial organic growth.

Interest-sensitive businesses

"Interest-sensitive businesses, including group annuities, generated about half of the earnings for the year, with the balance spread among individual life, group life, and accident and health. Within the major business lines, some product lines experienced volatility and, in some cases, losses such as long-term care, which continues to be challenged despite the approval of large rate increases in recent years," reads the report, which goes on to mention that the blocks of legacy variable annuities which offered richer guarantees are underperforming and also putting pressure on earnings.

What might the future have in store? A. M. Best says there is a certain amount of regulatory uncertainty ahead; insurers will need to adapt to both the systemically important financial institution (SIFI) designation and to the US Department of Labor fiduciary rules which have been expanded to include fixed indexed annuity products. As for interest rates, A.M. Best’s believes that they will remain lower for longer.

Potential for a credit cycle decline

"Even with some movement in the overnight rate, a continued decline in net yield for investment portfolios will likely be realized during 2016. It is possible that absolute income growth will be strained as well without the support from moderately higher interest rates and asset growth in the insurers’ balance sheets," concludes the report. "This view can be exacerbated by the potential for a credit cycle decline, which would impact pricing on the BBB rated and below bonds as well as liquidity concerns for less liquid assets. It is A.M. Best’s view that these conditions will not likely happen quickly and would be more of a gradual process over several quarters."