A.M. Best Briefings: U.S. Life/Annuity, Health Rating Outlooks Remains Stable

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FOR IMMEDIATE RELEASE

OLDWICK - JANUARY 06, 2015 08:48 AM (EST)
A.M. Best has maintained its stable outlook for the U.S. life/annuity and health sectors, although the sectors continue to experience the same gnawing concerns that have challenged each industry the past few years, such as low interest rates, regulation, and in the health segment, the Patient Protection and Affordable Care Act (ACA).

A.M. Best has observed that despite interest rates remaining "lower for longer," life/annuity companies have continued to endure, and spread-based earnings generally have been resilient through careful management of crediting rates. However, the overall asset/liability matching process has been somewhat harder to manage, as many carriers went short on the asset side in anticipation of rising rates in 2014. Spread maintenance has been impacted positively by expense reductions at the corporate level and in product distribution. However, A.M. Best is concerned that the "easy" fix options have been exhausted and that further reductions may cut expenses too deeply in areas that are needed to develop and sustain growth.

Other key factors behind the outlook include:

• A benign credit environment with very low levels of impairments across all asset classes;


• A boost from higher equity markets resulting in increased assets under management (and the resulting fee income), lower hedging costs with generally reduced volatility, and reserve releases as net amount at risk declines on legacy variable annuity products;


• High levels of reported risk-adjusted capitalization;


• Stable trends in both statutory and GAAP earnings;


• Continued product de-risking;


• Improving economic conditions domestically;


• Ongoing refinement of risk management with respect to model validation, risk appetite and risk tolerances; and


• Low cost (re)financing opportunities with demonstrated demand in the capital markets.

As portfolio yields continue to decline slowly, companies have continued to search for yield, somewhat at the expense of lower liquidity (as opposed to higher credit risk). Life/annuity writers also continue to seek growth both organically and through acquisitions, especially abroad. However, despite some adverse trends, A.M. Best's stable rating outlook reflects the life/annuity industry's history of resilience in the face of such factors.

The stable rating outlook for the U.S. health insurance industry reflects A.M. Best's belief that health insurers generally have succeeded in managing through the various issues in 2014, including the rollout of health insurance exchanges with guaranteed issue coverage; the expansion of Medicaid; payment of the ACA health insurer fees; and changes to Medicare Advantage funding.

Even with the rapid premium growth resulting from the exchanges and Medicaid expansion, overall earnings for most health insurers continued to be favorable for 2014, with many companies reporting strong operating results. A.M. Best has observed that profit margins have compressed over the past few years and declined further in 2014. They could also decrease slightly in 2015, as the ACA fee increases and there is a continued shift to products with lower margins. A.M. Best views this lower level of margins for health insurers as a reset for the industry and the new norm. Therefore, A.M. Best expects health insurers to remain profitable – just at a slightly lower level.

To access the full, complimentary copy of these briefings, please visit:

• U.S. Life/Annuity: http://www3.ambest.com/bestweek/purchase.asp?record_code=232322.


• U.S. Health: http://www3.ambest.com/bestweek/purchase.asp?record_code=232320.

In addition, video interviews with A.M. Best Vice President Stephen Irwin and Assistant Vice President Sally Rosen on the U.S. life/annuity and health segments, respectively, are available:

• U.S. Life/Annuity industry: http://www.ambest.com/v.asp?v=fmlifeannuity115


• U.S. Health industry: http://www.ambest.com/v.asp?v=fmhealth115

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.