AM Best Anticipates Steady Growth in US Life/Annuity Sector
The renowned credit rating agency, AM Best, projects a steady growth trajectory for the US life/annuity (L/A) insurance sector, estimating a capital and surplus increase of approximately $48 billion over the 2024-2025 period. This forecast is detailed in a recent Best’s Market Segment Report.
The sector’s net income is poised to exceed pre-pandemic levels, with an anticipated $51.1 billion by 2025, a significant rise from $37.9 billion recorded two years earlier. However, the sector’s return on equity is expected to see a decline, falling by 2.5 percentage points to around 8.2% during the same timeframe.
In its annual Review & Preview report for the L/A industry, AM Best emphasizes that the sector’s balance sheets remain robust and continue to show growth. Notably, capital levels have increased during the first three quarters of 2024 compared to the end of 2023.
Last December, AM Best maintained its stable outlook for the sector, attributing this to strong liquidity, robust annuity sales, and a persistently favorable credit environment. “There are ongoing concerns, including uncertainty and volatility in financial markets, risks in certain asset classes, and legacy liabilities,” noted Michael Porcelli, Senior Director at AM Best. “Nonetheless, equity markets performed strongly last year, and credit spreads continued to narrow.”
The US L/A sector experienced a modest 0.8% increase in statutory capital and surplus through September 2024 compared to year-end 2023. However, statutory net income witnessed a 31% decline in the first nine months of 2024 compared to the same period the previous year.
The report highlights a growing trend of insurers owned by private equity and asset managers, which have significantly increased in both number and assets in recent years. These insurers now account for nearly 10% of the L/A industry’s admitted assets.
With substantial capital backing these entities, this trend is expected to continue. While many of these insurers and their private equity/asset manager owners have explored diversifying into pure life insurance, the annuity sector remains their principal focus, as noted by Porcelli.
Despite rapid expansion in premiums and balance sheets, the operating results for these private equity and asset manager-owned insurers have generally mirrored those of stock companies. Since the growth surge began in 2021, median returns on equity for these insurers have been slightly lower than those of stock companies.
Looking forward, AM Best asserts that the L/A sector possesses ample liquidity and capitalisation to weather short-term volatility. However, some companies may face challenges in retaining market share as they adapt to evolving consumer demands. Additionally, increasing competition in the annuity market could lead to pricing pressures and a greater emphasis on product differentiation.
