US L/A industry reports record capitalisation

Written by Adam Cadle

14/03/2022

US life insurance and annuity writers achieved record levels of capitalisation, maintained strong liquidity and posted improved earnings in 2021 despite historically low interest rates, inflationary headwinds and continued pandemic uncertainty, according to AM Best.

The industry’s capital and surplus showed solid growth through third-quarter 2021, up $26.2bn to $480.8bn, and is likely to continue to grow for full-year 2021. The life/annuity segment recorded net income of $27bn in the nine-month period, up 105% from the same prior-year period, with overall sales of life insurance and annuities seeing strong growth. Many companies benefited from their prior investments in enterprise risk management, took advantage of the opportunity to shed legacy businesses and saw realised and unrealised gains from strong financial markets.

Schedule BA assets continued to grow, to 8.4% of total invested assets at third-quarter 2021; compared with 6.2% in 2016, although some insurers have securitised Schedule BA assets and sold them to institutional investors as a way to diminish exposure and capital risk charges. Although the commercial mortgage loan market has seen increases in delinquencies, exacerbated by the pandemic, life/annuity insurers’ allocations still grew, albeit with a modest shift to industrial properties and multifamily housing from office and retail.

AM Best said overall headwinds from the low interest rate environment, as evidenced by an investment yield that has declined each year of the past decade and was 4.1% in 2020, are likely to continue to create drag on margins until longer-term interest rates and credit spreads return to more-historical levels.

New capital continues to enter the life/annuity market, driven by private equity firms with an ability to source and manage fixed-income assets and greater interest in the pension risk transfer market. Additionally, with insurers willing to shed certain blocks of business, merger and acquisition activity ramped up in 2021. AM Best said it expects the life/annuity industry to reach an equilibrium between companies seeking opportunities to build a less capital-intensive business, minimise the pressure of persistent low interest rates on profitability and diversify earnings; and companies with fixed-income asset management sourcing, evaluation capabilities and a capital-intensive business appetite.

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