Best’s Special Report: U.S. Life/Annuity Industry Posts 25% Decline in Pre-Tax Operating Earnings in 2018

Business Wire

OLDWICK, N.J.--(BUSINESS WIRE)-- The majority of U.S. life/annuity insurance companies posted favorable operating results in 2018; however, statutory pre-tax operating gains declined by 25%—the largest drop in five years—to $47.8 billion in 2018 from $63.7 billion in 2017, according to an AM Best special report.

The new Best’s Special Report, titled, “Favorable 2018 Statutory Results for Life/Annuity Industry,” states that the drop was driven by a number of large dollar amount, one-off transactions (including affiliated reinsurance and captive transactions), as well as company-specific events at large organizations, which had a neutral impact on enterprise-wide operating results. The notional amounts of these transactions skewed AM Best’s statutory industry results, as AM Best’s results do not capture captive or international affiliates’ data, which would include offsets to these transactions.

After-tax earnings decreased just 14%, to $44.4 billion, as income taxes declined nearly 75%, owing to tax reform. The industry’s effective tax rate was 7%, compared with 19% in 2017. Statutory net income declined by 7% to $39.9 billion. Overall underwriting performance was favorable, although margins were dampened by a decline in net investment gains. Headwinds to earnings growth persist, due to diminishing investment portfolio returns, rising technology spending, mature ordinary life and accident and health markets and intensifying competition for consumer wallet share.

Premiums increased and annuity sales improved as the drag from the Department of Labor’s fiduciary rule changes has diminished. Individual annuity direct premiums written reversed two years of declines by rising nearly 14% over 2017. Group annuity premiums grew 9%, bolstered by continued growth in pension risk transfer transactions during the year. Fixed index annuity sales also were very strong for the industry.

Offsets to the macro-economic challenges L/A insurers faced in 2018 include favorable underwriting and prudent risk management, as a realignment of product portfolios resulted in favorable statutory and GAAP operating profitability. Furthermore, hedging remains prominent, to help mitigate earnings and capital volatility driven by the macro-environment and to manage risks inherent in embedded product guarantees. However, AM Best remains wary given the volatility in business lines that are more sensitive to interest rates and the equity markets, as well as lines exposed to significant policyholder behavior risks that could require additional reserves.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=286733.

AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.