Best’s Special Report: Smaller Companies Face Cash Flow Crunch from Uptick in U.S. Life/Annuity Surrenders
The value of surrendered annuity policies among
In a newly released Best’s Special Report, AM Best notes that while the
Surrender benefits topped
Companies unable to replace surrendered business are most likely to see a shrinking asset base, as maturing bonds may be used to cover additional surrenders instead of being reinvested. The annuity market is highly competitive, with the higher interest rate environment leading to many new entrants, some without the burden of needing legacy system upgrades, as well as companies backed by private-equity and investment management firms that can leverage sophisticated investment expertise.
On a cash flow basis, companies in AM Best’s individual annuity composite have observed a downward trend much steeper in the ratio of premium cash flow in to benefits & surrenders cash flow out than reported at individual life and diversified companies in multiple lines. When the individual annuity composite is viewed by premium scale, those smaller companies have seen the greatest deterioration in the cash flow ratio, with incoming premiums not covering benefits and surrenders flowing out. The percentage of smaller companies with negative cash flow from operations has been trending up to a greater degree than for medium size and larger organizations, indicating possible shifts in market share. “Negative cash flows could lead to the selling of assets at unrealized loss positions, as higher interest rates have depressed bond values,” said
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=348358.
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Source: AM Best
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