Best’s Market Segment Report: AM Best Maintains Stable Outlook on U.S. Life/Annuity Insurance Segment
AM Best is maintaining its stable outlook on the U.S. life/annuity market segment for 2024, noting its strong liquidity and capital positions, robust annuity sales and slightly improved new money yields in a benign credit environment.
The stable outlook is supported by the industry’s absolute level of capital, as well as solid levels of risk-adjusted capitalization, according to the new Best’s Market Segment Report, “Market Segment Outlook: U.S. Life/Annuity.” The report notes while there may be higher required capital due to premium growth, both capitalization metrics are expected to remain favorable.
“Strong capital buffers and the ability to maintain excess capital allow the industry to absorb financial market risks and potential changes in asset and liability valuations,” said Ed Kohlberg, director, AM Best. “This is expected to be bolstered as new capital is injected into the industry.”
Despite very strong levels of risk-adjusted capital, there are some headwinds, according to the report. Inflation may continue to hamper profitability. Credit losses in commercial mortgages and collateralized loan obligations may also pose some risk, although AM Best has not yet seen a material increase in impairments and defaults.
Growth within the life/annuity industry continues to be strong, amid 10 straight quarters of year-over-year individual annuity premium growth, mainly attributable to ongoing equity market declines and rising interest rates. This has led to solid growth for fixed rate deferred annuity sales and fixed indexed annuity sales. Growth in the annuity market has created increased competition as many new companies have entered the space. This includes several new private equity and asset management-backed insurers looking to capitalize on the difference between the cost of liabilities and potential favorable investment returns.
However, AM Best is concerned that annuity growth will be accompanied by an increase in surrender benefits. Although surrenders topped $100 billion in the second quarter of 2023, they remain low as a percentage of annuity premium growth.
“Companies are proactively looking to mitigate the risk and disincentivize surrenders,” said Jacqalene Lentz, director, AM Best. “In many cases, companies are attaching market value adjustments, or MVAs, to surrender charges, so that if yields are higher at the time of withdrawal than when the contract was purchased, the MVA increases the surrender charge.”
To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=338148.
To view a video with AM Best Director Ed Kohlberg about the U.S. life/annuity market segment outlook, please visit http://www.ambest.com/v.asp?v=laoutlook1223.
Leading AM Best analysts will review 2023 market segment outlooks for the U.S. insurance industry’s major segments, the global reinsurance industry and the delegated underwriting authority enterprises (DUAE) segment in an online briefing scheduled for Tuesday, Dec. 12, 2023, at 2 p.m. (EST). To register for the complimentary briefing, please go to http://www.ambest.com/conference/USMB2024.
To view current Best’s Market Segment Outlooks, please visit http://www.ambest.com/ratings/RatingOutlook.asp.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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