AM Best forecasts moderate growth for US life/annuity insurance sector in 2024-2025 period

AM Best, the credit rating agency, forecasts moderate growth of approximately $48 billion in capital and surplus for the US life/annuity (L/A) insurance sector over the 2024-2025 period, as detailed in a new Best’s Market Segment Report.

The segment’s net income is expected to surpass pre-pandemic figures, reaching an estimated $51.1 billion in 2025, a notable increase from $37.9 billion just two years prior.

However, return on equity for the L/A sector is anticipated to decline by 2.5 percentage points, settling at around 8.2% during the same period.

In AM Best’s annual Review & Preview report for the L/A industry, it is highlighted that the sector’s balance sheets remain solidly capitalised and continue to grow. Capital levels increased over the first three quarters of 2024 compared to year-end 2023.

Last December, AM Best affirmed its stable outlook for the sector, citing strong liquidity, robust annuity sales, and a sustained favourable credit environment.

“There are still some lingering concerns that include uncertainty and volatility in financial markets, risks in certain asset classes and legacy liabilities,” added Michael Porcelli, Senior Director, AM Best. “Overall, the equity markets performed strongly last year and credit spreads continued to shrink.”

The US life/annuity (L/A) sector saw a modest 0.8% rise in statutory capital and surplus through September 2024, compared to year-end 2023. However, statutory net income dropped by 31% in the first nine months of 2024, compared to the same period the year before.

The report also points out a growing trend of private equity and asset manager-owned insurers, which have significantly increased in number and assets over recent years. These insurers now represent nearly 10% of the L/A industry’s admitted assets.

With substantial capital backing these firms, this trend is expected to persist. Although many of these insurers and their private equity/asset manager owners have explored diversifying into pure life insurance, the annuity sector continues to be the dominant focus, as noted by Porcelli.

Despite the rapid expansion of premiums and balance sheets, the operating results for private equity and asset manager-owned insurers have generally followed 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 ahead, AM Best maintains that the L/A sector has ample liquidity and strong capitalisation to handle any short-term volatility.

However, some companies may struggle to retain market share as they adjust to shifting consumer demands. Additionally, intensifying competition in the annuity market could lead to pricing pressures and a stronger push for product differentiation.

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