Historic 2021 US individual life, annuity premium growth a tough act to follow

Introduction

Growth in ordinary life insurance business at a rate without recent precedent, in combination with a recovery in ordinary individual annuities from a pandemic-induced pullback, pushed the U.S. life and health sector in 2021 to its strongest expansion in direct premiums and considerations in 15 years at approximately 7%.

Not since 2000 have ordinary life direct premiums increased or decreased by more than 5% in a single calendar year. In 2021, according to an S&P Global Market Intelligence preliminary review of data from annual statutory statements, ordinary life business volume spiked by 10.7%. Fueled by the implications of a provision in a December 2020 federal COVID-19 relief bill and some pent-up consumer demand for life insurance amid the pandemic, the growth rate exceeds the peak expansion in the 25 years for which we have data available, at 8.4% in 1998.

Meanwhile, strong consumer balance sheets, continued demand for retirement savings solutions, and product innovations helped ordinary individual annuity direct premiums and considerations to rise 14.9% in 2021. That exceeded the 14.3% growth rate the business achieved in 2018 as it benefited at the time from more favorable interest-rate and regulatory landscapes.

Both business lines benefited from easy comparisons in 2021 that will not recur in 2022, but many of the same factors that contributed to outsized expansion remain in place. Moreover, rising interest rates could provide an additional boost to the individual and group annuities businesses.

Whole, universal life lead the way

Ordinary life expansion varied widely by product line, with 2021 results reinforcing the notion that revisions to section 7702 of the Internal Revenue Code helped lift growth rates to new heights.

Section 7702 broadly applies to permanent cash value life insurance policies, including whole life and various types of universal life, and it contains tests to determine whether a policy's death benefits and cash value accumulation qualify for more favorable tax treatment. The December 2020 revisions lowered the interest rate floors used in those tests for 2021, which effectively allowed customers to pay higher amounts of premiums into policies to build additional cash value relative to the associated death benefit while still being considered life insurance under the tax code.

Our analysis of the Exhibit of Life Insurance for 2021 finds a 6.2% increase in the number of whole life policies and endowments issued across the industry, marking the first positive result since 2016. The whole life and endowments category incorporates the policies impacted by the Section 7702 revisions. The data further show that the aggregate amount of insurance issued under whole life policies and endowments soared 17.1%, which stands as the highest year-over-year rate of expansion since 1997. Other forms of ordinary life insurance, which is largely comprised of term life business, experienced a 2.6% decline in the number of policies issued and a 2.6% rise in the amount of insurance issued.

Premiums by policy type are only available net of reinsurance, but those statistics also strongly suggest a tailwind from the Section 7702 changes. On a net basis, individual life insurance premiums increased 13.7% in 2021 after declining 2.9% in 2020. The strongest growth among major product types occurred in universal life and variable universal life, which produced respective growth rates of 60.8% and 22.9% as compared with rates of decline in excess of 40% in 2020. Whole life net premiums increased 13.3% after having risen 1.9% in 2020. Term life premiums, which surged 39.5% in 2020, declined 5.4% in 2021.

Individual annuities bounce back

Congressional legislation may offer a boost to annuity production in future years. A U.S. House of Representatives proposal would allow group annuities to be classified as qualified default investment alternatives in 401(k) plans as part of an effort to improve Americans' financial security in retirement. The measure would permit up to 50% of periodic employee 401(k) contributions and 50% of account assets to be allocated to annuity contracts that meet certain specified criteria.

Group annuities faced a headwind in 2021 that was unique among U.S. life and health lines in that the market dislocation around the declaration of a pandemic in March 2020 fueled substantial inflows into stable-value products by participants in employer-sponsored benefit plans. The full-year 2021 decline in direct premiums and considerations in the business line of 1.8% came despite an expansion of 6.7% in the product segment during the last three quarters of the year. The momentum reflected the impact of heightened pension-risk transfer activity.

The growth trajectory of the ordinary individual annuity business went in an entirely different direction in 2021. Direct premiums and considerations surged in the second quarter of the year in particular as the industry benefited from an easy comparison with a period in 2020 that had been characterized by significant new business headwinds in the form of temporary market retreats by certain market participants and the impact of pandemic-related stay-at-home measures on distributors. S&P Global Market Intelligence estimates that ordinary individual annuity direct premiums and considerations increased by only 2% in the fourth quarter of 2021 as the industry confronted a more normal comparison with the year-earlier period.

Survey data compiled by the Secure Retirement Institute shows individual annuity sales growth of 16.3% for the full year, but approximately one-half of that rate in the fourth quarter. Traditional variable annuities and registered index-linked annuities generated double-digit percentage growth in the quarter and full year, offset by relative weakness in fixed-rate deferred annuity sales.

The impact of COVID-19 disruptions on 2020 volumes can also be seen when comparing 2021 production as disclosed in annual statutory statements to the 2019 result. In that context, direct premiums and considerations in the ordinary individual annuity business increased 9.2%.

Rising interest rates could offer a boost to various types of annuities in 2022 both in terms of consumer demand and the supply of more innovative, attractively priced products.

Methodology

Results in this article for 2019 through 2021, unless otherwise noted, reflect the aggregation of data for 617 individual U.S. life entities that filed 2021 statutory statements as of March 2, not including three entities that traditionally rely on international markets for the vast majority of their business: MetLife Inc.'s American Life Insurance Co. (DE), Assurant Inc.'s American Bankers Life Assurance Co. of Florida and CICA Life Insurance Co. of America. They also include the manual addition of 2021 results for Fidelity & Guaranty Life Insurance Co., given the company's significance in certain product categories. For periods prior to 2018, we used S&P Global Market Intelligence industry aggregates less the results for the three non-U.S.-focused entities.

Most of the measures discussed in the article reflect direct writings given the significant effects of reinsurance on net business volumes across key product categories. The timing of reinsurance agreements and the nature of the counterparties involved often lead to significant distortions in net premiums and considerations relative to direct business as well as net results for prior years. The impact has become more significant as the U.S. life and health industry has increased its reliance on reinsurers that are outside the scope of NAIC statutory data. In 2021, net premiums and considerations increased by 2.3% year over year, a fraction of the rate of growth in direct business, due in large measure to $31.01 billion in negative net premiums and considerations attributable to Ohio National Life Insurance Co. and Talcott Resolution Life & Annuity Insurance Co., each of which engaged in cessions to non-NAIC-filing reinsurers.

There were eight individual entities that ranked among the top 10 writers of both direct and net premiums and considerations across business lines: UnitedHealth Group Inc.'s UnitedHealthcare Insurance Co., Prudential Financial Inc.'s Prudential Insurance Co. of America, CVS Health Corp.'s Aetna Life Insurance Co., Metropolitan Life Insurance Co., Lincoln National Corp.'s Lincoln National Life Insurance Co., Northwestern Mutual Life Insurance Co., Massachusetts Mutual Life Insurance Co. and Cigna Corp.'s Cigna Health & Life Insurance Co.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}