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A.M. Best Special Report: U.S. Life/Annuity Industry First Quarter 2016 Statutory Earnings Impacted by Market Volatility


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FOR IMMEDIATE RELEASE

OLDWICK - JULY 21, 2016 04:12 PM (EDT)
During the first quarter of 2016, the U.S. life/annuity insurance industry reported a significant decline in statutory earnings when compared to the prior-year period, despite an overall increase in revenue. Additionally, the industry reported modest realized capital losses that impacted net income, which dropped to $3.7 billion in first-quarter 2016 compared with $13.7 billion in the prior-year period.

The new Best Special Report, titled, “Life/Annuity Industry First Quarter 2016 Statutory Earnings Impacted by Market Volatility,” also states industry capitalization remains favorable and continues to show modest increases in total capital. Although the combination of several general market conditions negatively impacted the industry as a whole, five insurance companies accounted for roughly $4 billion of pre-tax operating losses, related to one-time reinsurance transactions, reserve adjustments and derivative movements.

Macroeconomic volatility continues to challenge the industry’s operating performance. The significant volume of the industry’s total assets held in separate accounts ($2.4 trillion) exposes sales, earnings and guaranteed benefits of variable products to this equity market volatility. Moreover, the industry has generally experienced heightened mortality in recent periods impacting life profitability. A.M. Best notes that it is still too early to determine if recent mortality results are a sign of a longer-term trend or just short-term incidence.

Industry premium totals declined in the first quarter of 2016 to $144.7 billion from $167.5 billion in the preceding quarter, but are generally in line with first-quarter results of previous years due to seasonality trends. Individual annuities continue to make up the majority of premiums for the industry, representing 33% of total direct premiums for the first-quarter of 2016, and an increase of more than 10% from the same period in 2015. A.M. Best notes that the Department of Labor’s announced regulatory changes for the distribution of variable annuities had a major sales impact, with first-quarter sales declining 18%, as well as partially supporting a $5.6 billion net transfer out of the separate accounts. Ordinary and group life also remains core to the industry, contributing 27.1% of direct premiums written, as of first-quarter 2016. While growth for ordinary and group life sales has been slower than for annuities, it is expected to remain a key driver of long-term in-force profit for the industry.

Changes in the industry’s total capital remain positive in the first quarter, but are constrained by the lackluster operating results. Furthermore, the lack of capital growth can be partially attributed to capital deployment, acquisition activity, share repurchases and dividends as companies look to improve operating returns on equity. A.M. Best views the industry as currently having generally adequate risk-adjusted capitalization, which is supported by the continued overall profitability.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=251786 .

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