OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best is maintaining its negative outlook for the U.S. life/annuity (L/A) industry in 2018, citing increased volatility across economic and regulatory fronts, which includes the potential for a correction in the equity and credit markets.
The Best’s Briefing, titled, “Market Segment Outlook: Life/Annuity,” states that A.M. Best recognizes L/A insurers’ efforts to reduce overall balance sheet risk over the past decade. Despite significant earnings headwinds, the industry has been able to grow overall capital. However, on the macroeconomic front, A.M. Best believes that the lower-for-longer interest rate environment continues to move insurers into potentially less liquid asset classes. While well-underwritten credit assets appear to have been prudently managed to date, A.M. Best notes that the credit cycle has been benign for a very long time and there is the potential for correction in the intermediate term. The briefing outlines other factors that are driving the negative outlook, including as follows:
- A flattening yield curve, which can continue to pressure insurers' operating earnings;
- Declining annuity sales, which hit a 15-year record low in third-quarter 2017 despite an improving U.S. economy;
- Lack of heavy investment in InsurTech solutions to modernize the business model – many companies still struggle with legacy systems, constraining operating performance; and
- Evolving regulatory issues such as the proposed update to risk-based capital bond factors, which could impact insurers’ asset allocation strategies, and principle-based reserving, which has not had a material impact in improving operating margins as some insurers have deferred adoption.
In addition, the prospect of tax reform could have implications for certain asset classes. The proposed decline in tax rates and a cap on the corporate tax deduction may make corporate bond issuance less attractive, which would be a negative for an industry that relies heavily on corporate bond issuance. A.M. Best remains cautious on estimates of the tax reform proposals to the overall U.S. economy given considerable uncertainty regarding projected economic growth. Although a cut in the absolute tax rate to 20% is a significant benefit to U.S. companies, there are offsets to the life industry, as the proposal could negatively impact the admissibility of deferred tax assets for statutory accounting purposes and more immediate recognition to changes in computing reserves.
To access the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=269052.
A video interview with Anthony McSwieney, senior financial analyst, also is available.
A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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