The life and annuity industry’s stable outlook for 2016 means that advisors can expect much of the same this year compared with 2015. That prediction is from ratings houses and more than a dozen industry executives and consultants.
Indexed annuities, indexed life insurance and whole life insurance are two product areas where experts said the industry is likely to see some growth.
“We should see continued growth of index products despite regulatory changes, while the no-lapse guarantee business will continue to decline,” said Robert J. Ehren, senior vice president of life product manufacturing with Securian Financial Group.
Whole life products generated and sold by large mutual companies with career agents, should see “conservative growth with variable business continuing its slow comeback,” he added.
Ehren’s comments, along with the thoughts of 13 other life insurance executives and consultants, were published this week as part of LOMA’s annual life insurance forecast. The information was generated from a survey of the executives.
Annuity sales will be flat in 2016 compared with 2015 “with significant downward pressure emerging in 2017 if the Department of Labor proposal is implemented.” That’s according to Marita Zuraitis, president and CEO of Horace Mann Insurance.
Life insurance sales also are expected to be flat, or perhaps see a moderate increase, she added.
“Indexed universal life continues to grow faster than other product categories,” said Zuraitis, whose company serves the education market.
As a rule, the life insurance executives said they expect to see slow to moderate sales of policies and premium growth, with indexed products and whole life shining relatively brightly.
“From a product perspective, whole life looks particularly strong,” said Michael R. Fanning, executive vice president, U.S. Insurance Group, with MassMutual.
Debt ratings houses Fitch and A.M. Best have issued “stable” outlooks for the U.S. life and annuity sector in 2016 as positive trends surrounding life insurance carriers outweigh the challenges — at least for the moment.
Life insurance industry capital ratios and life insurance carrier operating performance have improved in a credit environment that remains “benign,” according to Thomas Rosendale, assistant vice president with A.M. Best. Rosendale made those comments in an interview with A.M. Best TV.
The forgiving credit environment means that insurers that need to issue debt can do so easily and bank lines are also easy to come by, he also said.
Indeed, over the past 18 months, many life insurers have been buying back their own shares, a sign that management is confident about investing in itself.
“We've been in a pretty favorable environment for impairments, impairments remain low,” Rosendale said. “We expect they'll be low at least for the near term so that's contributing to net income, which again contributes to capital.”
Life insurance carriers in 2016 would benefit from strong balance sheets, improving liability profiles and stable operating performance, Fitch Ratings said in a separate research note to clients.
Over the past several years, for example, life insurers have been reducing their exposures to variable annuities by cutting back on guarantees and limiting sales, a risk management process known as “de-risking.”
Although the Federal Reserve raised a benchmark interest rate by a quarter percent last month, rates are still very low by historical standards. These interest rates remain a challenge for life and annuity carriers, according to the ratings analysts.
“It’s a drag on net yields,” Rosendale said. “It perpetuates a continuation of spread compression that we see in the life and annuity product lines.”
“The biggest factor is interest rates,” Fanning said, and with rates at current levels, “margins and profits will remain under pressure.”
Life insurers typically derive their profits from the spread between their portfolio earnings and what they credit as interest on insurance policies. Insurers find themselves squeezed — or compressed — during times of extended low interest rates as investment income is insufficient to meet guaranteed obligations to policyholders.
“Low interest rates have been a major headwind for the insurance industry for some time,” Andrew Edelsberg, senior director of the Kroll Bond Rating Agency, wrote in a December research note to clients. “Interest rates drive margins on most life and annuity products through both crediting rates and reserve calculations.”
As the U.S. economy slowly improves and unemployment drops further, many Wall Street analysts speculate that rates will continue to rise through 2016.
Some analysts predict the Federal Reserve will raise rates twice, and others speculate the central bank will execute as many as four interest rate hikes in 2016.
But that’s just speculation and rising rates in 2016 is far from certain, Rosendale said.
Rosendale’s sentiment was echoed by Anthony M. Garcia, president and CEO of Foresters, who was among the executives surveyed in the LOMA life insurance forecast.
“We see the current interest rate environment continuing over the next 10 years,” Garcia said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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