OLDWICK, N.J.--(BUSINESS WIRE)--The U.S. life/annuity insurance industry reported a significant decline in statutory earnings at the end of the second quarter of 2016 compared with the prior-year period, despite an approximate 3% overall increase in premiums and annuity considerations, according to a new A.M. Best special report.
The Best’s Special Report, titled, “U.S. Life/Annuity Industry Second Quarter 2016 Statutory Earnings Impacted by Market Volatility,” states that premium income increased despite significant headwinds to new variable annuity sales, reflecting uncertainty surrounding the Department of Labor’s fiduciary rules. While variable annuity sales saw a marked slowdown, much of the decline was offset by higher sales of fixed and fixed-indexed annuities. However, low interest rates continue to compress earning spreads on universal life and fixed annuity products, and despite market expectations of increases to the federal funds rate by the Federal Reserve, U.S. Treasury bond rates continued to decline and the yield curve flattened during the first quarter of 2016.
Overall, the industry has been challenged to maintain premium growth due to its mature nature, difficulties in penetrating the middle market and millennial populations and expected regulatory changes. The report notes that company strategies to counteract market challenges have included diversifying books of business and looking for growth in less interest-sensitive, fee-for-service wealth management business; yet, the popularity of guaranteed products for retirement income has driven sales of fixed annuities and products with guaranteed benefits. While insurers no longer are offering the rich guarantees seen in the past due to product de-risking, there is still a desire for policyholders to obtain a return on their funds while protecting the downside. This is creating strong sales, particularly for index products such as fixed indexed annuities and indexed universal life insurance.
A.M. Best continues to be concerned with companies that have large blocks of interest-sensitive business given the continued declining trend in interest rates. While earnings margins remain positive, spread compression is expected to continue given the low rate environment and continued reinvestment of cash flows into lower-yielding securities. While total net investment income recorded a modest 2.9% increase year over year, the increase was markedly lower than the 7.9% increase in invested assets. Additionally, alternative asset returns are less robust than recorded in earlier periods.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=254514.
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