Life and Annuity Carriers See 3Q Earnings Stall

Third-quarter earnings for U.S. life and annuity insurers stalled in the face of a volatile stock market and as low interest rates affected investment returns on bonds, according to a new report.

Bonds are typically the largest holdings in insurance companies’ portfolios

U.S. life and annuity insurers reported third-quarter 2015 net investment income of $42.9 billion, a 2.9 percent dip compared to $44.2 billion in the year-ago period, according to A.M. Best & Co. Inc. in a report issued last week.

Third-quarter net investment income dropped 4.2 percent compared to $44.8 billion in the second quarter, A.M. Best reported.

Lower earnings were also due to reserve increases, diminished mortality results, large reinsurance transactions and hedging, A.M. Best analysts Edward Kohlberg and William Pargeans wrote in their research note.

“When looking at which companies contributed the most to the diminished third-quarter results for the industry, 10 of the largest insurance groups were materially driving the quarterly earnings down, many of which had losses for the quarter,” Kohlberg and Pargeans wrote.

Underwriting results for the industry, however, remain “relatively solid,” the industry analysts said.

In underperforming business lines, such as long-term care, carriers have sought — and often received — price increases. Third-quarter pretax operating gains fell by 71 percent to $3.6 billion compared to the year-ago period, according to the report.

Capital and surplus grew by 1.8 percent to $371.7 billion compared to the year-ago quarter.

Middle market penetration

Industry sales of life insurance remain sluggish, which translates into a small increase in direct premium income and many analysts — A.M. Best’s included — point to the difficulty of selling insurance into the middle market.

Middle-market buyers often object to buying life insurance on the assumption, often misplaced, that coverage is too expensive. That has limited the industry’s ability to underwrite new policies and generate premium revenue.

In many cases, individual term life for preferred buyers is as cheap as it has ever been, which has led some industry watchers to blame sluggish sales misplaced or conflicting sales strategies.

Industry critics also claim the industry has been slow to tailor technology to reach younger millennials via the Internet and mobile devices.

But while the industry has had trouble reaching middle market buyers, a new crop of baby boomers and Generation Xers a decade removed from retirement need retirement income products, which has made fixed annuities more popular than in the past.

“This is creating strong sales, particularly for index products, both fixed indexed annuities and indexed universal life,” wrote Kohlberg and Pargeans.

In the third quarter, individual annuity premiums made up 25.9 percent of all direct premiums written by life and annuity carriers. Group annuities made up 15.5 percent of all direct premiums written, A.M. Best said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.