A 5% decline in total statutory revenue for 2005 signals that U.S. life insurers are engaged in a delicate balancing act–how to energize the top line without jeopardizing statutory earnings and capital.
Fitch believes that much of the 2% decline in premium for 2005 can be attributed to a deliberate pullback by life insurers who have been assessing how developments in the regulatory and reinsurance arena will affect products and pricing. The industry is trying to figure out how to respond to growing demand for life and annuity products with long-term guarantees. These products are adding hard-to-quantify risks to the liability side of the balance sheet just as the industry has successfully reduced risk on the asset side.
Also contributing to the revenue decline in 2005 was flat investment income and declining investment yields, which have plagued the industry for the last five years. Fitch anticipates that the gradual rise in interest rates now under way will stop the slide in investment yields, although the impact in 2006 is likely to be minimal. Fee income associated with separate accounts increased 6%, although that is still a relatively small part of total revenue.
The total revenue number was also affected by a dramatic decline in reserve adjustments on reinsurance ceded. These adjustments, which are used in connection with modified coinsurance, are offset by an expense item and do not affect earnings. The decline in this revenue item reflects overall reduced levels of reinsurance ceded and higher retention rates.
Growth in total revenue was somewhat better among the largest life insurers. The top 25 life insurance groups–ranked by total admitted assets–experienced a 2% decline in total revenue compared with the industry’s 5%. Premium grew 2% for the large insurers vs a 2% decline for the industry. The most significant difference was in growth in investment income–5% for the top 25 life insurers compared with 2% for the industry.
A variety of factors drove results in the industry’s core segments. In the individual life segment, product development is in transition as companies respond to increased regulatory reserve requirements for term and universal life with secondary guarantees, uncertainty about the potential impact of “principles based” reserving, reduced and/or higher cost reinsurance capacity, and the need for products to comply with the 2001 Commissioners Standard Ordinary mortality tables.
Universal life was the only individual life product to experience sales growth in 2005, according to LIMRA’s year-end 2005 report, although the rate of growth declined to 10% from about 24% in 2004. Overall sales growth in the individual life line was up just 2% for the year, reflecting declines in whole life, term and variable life sales. Growth was concentrated among the leading writers, according to LIMRA.
Individual annuity sales declined 3% in 2005 compared with a 3% increase in 2004 (Kehrer/LIMRA). Annuity trends over the past few years have been driven to a large extent by equity-indexed annuity (EIA) sales, which grew more than 80% in 2004 compared with total fixed annuity growth of 14% (Beacon). Sales growth slowed starting in 2005 as the industry assessed potential regulatory changes affecting the EIA product. Variable annuity sales were up just 2% year over year. The financial markets have a significant impact on annuity sales, which vary with changes in interest rates and equity markets. Insurers who do not have a flexible product suite can get left behind.