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February 23, 2009 at 07:00 PM
U.S. life insurers saw revenue strengthen in 2006 as growth in premium and separate account asset-based fee income offset continued flat investment income.
Strong equity market performance and an unfavorable interest rate environment in 2006 accelerated the trend away from traditional fixed products in favor of variable products. Variable annuities with living benefit guarantees were the primary driver of growth, offsetting declines in fixed annuity sales.
Regulatory uncertainty continued to be a drag on equity indexed annuity sales.
Individual life sales also improved in 2006 with stronger growth in all product lines except universal life, which was relatively flat. Life settlements likely had a significant impact on 2006 sales, particularly in the UL line, although it is difficult to quantify.
U.S. life insurers’ statutory operating earnings declined modestly in 2006 due in part to statutory strain related to strong VA sales. Policyholder dividend payouts also increased slightly. The industry continues to manage operating expenses as indicated by the trend in the expense to asset ratio in the accompanying chart. Net income declined 5% despite improved realized investment gains, due primarily to higher tax payouts.
Tight spreads on fixed products continued, with the industry portfolio yield down again to 5.72 in 2006 from 5.77 in 2005. Insurers did little to discourage higher surrenders of individual fixed annuities and the roll-off of maturing group fixed annuities in 2006 and the first half of 2007. Five-year single premium annuities sold in 2001 and 2002 undoubtedly account for much of the activity on the individual side. Group annuities have been increasingly made up of medium-term notes, which insurers offer to institutional investors opportunistically when the investment climate allows them to do so profitably. That has not been the case in recent years, although widening credit spreads may change that in the second half of 2007.
The higher surrenders contributed to anemic growth of the industry’s overall invested or general account assets. They grew just 3% in 2006, not even keeping pace with the portfolio yield. The growth rate compared to a year-over-year increase of 4% in 2005 and 7% in 2004. Some large VA writers saw a slight decline in invested assets for the year. Separate account assets associated with variable products grew 17% in 2006, reflecting favorable equity markets and the popularity of VAs with living benefit guarantees. A number of large VA writers also reported that fee income was actually overtaking spread income as the primary driver of earnings. That trend continued in the first half of 2007, although it may reverse itself in the second half of 2007, as fixed income spreads were widening in the wake of recent turmoil in the credit markets.
