OLDWICK, N.J.--(BUSINESS WIRE)--The U.S. life/health (L/H) industry recorded five financial impairments in 2014, an increase over the single impairment seen in 2013 and more than in any year since 2010, according to a new special report from A.M. Best. In line with historical results, the most common cause for the five new impairments was inadequate pricing (deficient loss reserves).
The Best’s Special Report, titled, “2014 Health Impairments Lead to an Increase for Life/Health Industry; Overall Trend Remains Favorable,” states that the 2014 study brings the total number of impairments for the study period, from 1969 to 2014, to 753, including the five new impairments and the nine from past years that recently came to light. Just over half of the impairments in this study are accident and health (A&H) insurers, and in 2014, three of the five impaired companies were A&H insurers. The average financial impairment frequency (FIF) remained unchanged at 0.80% over the period of this study. Overall, the L/H industry continued to experience lower impairment levels than in the property/casualty (P/C) segment; however, the margin between P/C and L/H decreased, as P/C saw a decline in impairments in 2014 to 12, versus the increase noted in the L/H segment.
The U.S. L/H industry weakened slightly in 2014. Widening underwriting losses mitigated nominal growth in investment income, driving operating gains lower, with the persistent low interest rate environment and a sluggish economy continuing to curtail growth. The industry’s pretax net operating earnings dropped to USD 49.9 billion in 2014, down from USD 65.7 billion in 2013. Net income also declined to USD 38.7 billion in 2014 from USD 45.0 billion in 2013, despite a sharp decline in realized capital losses. Spread compression from the low interest rate environment on interest rate-sensitive products remains a persistent problem.
A.M. Best has noted a rise in FIF around years of negative operating environments, and as these environments improve, impairments tend to decrease, as they did in 2010-2013. Although 2014 represents an increase over 2013’s favorable impairment results on the L/H side, the overall insurance industry level remains benign. However, the report also notes that these numbers are preliminary.
Rating trends are a key indicator of the financial health and stability of the insurance industry, because there generally is an increasingly downhill ratings trend before impairments increase. As of the publication date of this report, A.M. Best has maintained a stable outlook on the U.S. L/H and annuity segments. The stable outlook implies that the majority of 2015 rating actions for these segments are likely to be affirmations, with a fairly balanced distribution of negative and positive actions.
To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=239919.
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