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Difficult Group Annuity Comp Drags On Otherwise Strong US Life Premium Growth

Direct premiums and considerations in the U.S. life and annuity industry expanded at their slowest rate in six quarters as a challenging comparison in the group annuity line partially mitigated continued strength in the ordinary individual annuity business.

The industry faces an even steeper trek in the second half of 2019 as low interest rates will compound the difficulty in matching the historically high level of individual annuity business volume in the year-earlier period.

The aggregation of results reported by 671 individual U.S. life and health companies, excluding four entities that have historically generated the vast majority of their business from outside of the United States, shows 4.1% growth in direct business volume in the second quarter. Each of the previous four quarters saw rates of increase exceeding 7%. The growth rate would have been more than 3 percentage points higher, however, in the absence of an 8% decline in group annuity premiums and considerations.

S&P Global Market Intelligence projected in July that direct premiums and considerations would increase 3.1% in full year 2019 across the life, annuity, and accident and health businesses.

Lumpy group annuity growth

Rather than an indication of any weakness in the group annuity business, the decline is a result of an unusually high level of production in the second quarter of 2018 owing to a one-off transaction. LIMRA survey data on pension buyout sales, which represent a key driver of group annuity volumes, show volume of $11.10 billion in the second quarter of 2018. That ranks as the second most active period on record for pension buyouts, trailing only the fourth quarter of 2012 when two landmark transactions hit the books.

MetLife Inc.'s Metropolitan Life Insurance Co. led the industry in the second quarter of 2018 with group annuity direct premiums and considerations of $7.63 billion, largely as a result of its agreement to provide annuity benefits to FedEx Corp. retirees with associated pension obligations of approximately $6 billion. Its tally for the second quarter of 2019 tumbled to $1.87 billion. If one were to exclude Metropolitan Life from the industry results, group annuity premiums and considerations would have increased 9.8% on a year-over-year basis.

Prudential Insurance Co. of America led the industry with $4.20 billion in group annuity premiums and considerations in the second quarter, up from $3.09 billion in the year-earlier period. Prudential Financial Inc. Chairman, President and CEO Charles Lowrey characterized his company's pipeline for pension risk transfer deals as "robust" during an August conference call, though executives had conceded during a June investor day that the market had become more competitive.

Individual subsidiaries of Athene Holding Ltd., Principal Financial Group Inc. and Pacific Mutual Holding Co. also showed substantial growth in group annuity premiums and considerations in the second quarter.

Athene Annuity & Life Assurance Co. reported $707.3 million in group annuity premiums and considerations, up from $55.3 million a year earlier but down sharply from $1.92 billion in the first quarter. The company executed a $700 million pension risk transfer deal with Dana Inc. in the second quarter, and it anticipates an even larger boost in the third quarter from the completion of a previously announced transaction involving up to $3.8 billion of Bristol-Myers Squibb Co.'s pension obligations.

Principal Life Insurance Co.'s group annuity premiums and considerations rose to $872.2 million in the second quarter from $356.5 million in the year-earlier period. Renee Schaaf, president of retirement and income solutions at Principal, said during a July call that the company's pension risk transfer business focuses on deals ranging from $5 million to $1 billion in size, and she described her company's pipeline as "strong."

While the number of companies active in the pension risk transfer market speaks to the magnitude of the potential opportunity, Athene President William Wheeler cautioned during an August conference call that the lower interest rate environment could "soften industry activity, which would intensify competition for the transactions bought to market."

S&P Global Market Intelligence has projected a 1.9% decline in group annuity premiums and considerations in 2019.

Strong individual annuity growth rates unlikely to last

S&P Global Market Intelligence's cautious outlook for full-year 2019 growth in direct premiums and considerations was premised in part on the idea that the industry will struggle to keep pace with prior-year volumes in the ordinary individual annuity business. The second quarter may represent the last of the relatively easy comparisons, with growth of 9.8% in that business line.

Ordinary individual annuity premiums and considerations increased at rates well into the double digits in the three previous reporting periods, including 17.3% in the first quarter. The second quarter 2018 growth rate was 9.1%.

Quarterly statutory filings do not contain additional granularity regarding the nature of the annuity production by product type, but annuity sales estimates compiled by the LIMRA Secure Retirement Index suggest a more pronounced slowdown in growth rates. The LIMRA data show growth of approximately 6.5% in annuity sales during the second quarter across product lines, down from double-digit rates of expansion in each of the previous four quarters. Sales last grew at a slower pace in the first quarter of 2018.

Recent growth has been fueled by strong production of fixed-rate deferred annuities and indexed annuities. Sales of those products increased by 10.1% and 13.6% in the second quarter, according to the LIMRA Secure Retirement Institute, helping to offset stagnant variable annuity growth in a continuation of a longer-term trend.

All five of the leading individual writers of ordinary individual annuities in the second quarter, according to statutory data, showed year-over-year growth of more than 10%: Jackson National Life Insurance Co., Lincoln National Corp.'s Lincoln National Life Insurance Co., Allianz Life Insurance Co. of North America, American International Group Inc.'s American General Life Insurance Co. and Global Atlantic Financial Group Ltd.

That Jackson National achieved double-digit growth in ordinary individual annuity premiums and considerations is particularly noteworthy given its standing as the largest U.S. seller of variable annuities, according to LIMRA Secure Retirement Institute data. A comparison of LIMRA survey data for the past two second quarters suggests that the company's variable annuity sales plunged by 11.7% on a year-over-year basis, but the decline was more than offset with a steep rise in fixed annuity production.

Statutory data shows that Jackson National last achieved year-over-year growth in ordinary individual annuity premiums and considerations in the third quarter of 2018, and it has been since the fourth quarter of 2015 that its volumes expanded at a faster rate.

Jackson National CEO Michael Falcon said during parent Prudential PLC's August earnings call that the company launched a "competitive" fixed indexed annuity product early in 2019. He added that fixed and indexed annuities account for about 20% of the company's year-to-date sales, up from 5% in 2018.

S&P Global Market Intelligence projected growth of 4.4% in ordinary individual annuity premiums and considerations for full year 2019.

Life premiums surge

Unlike in the annuity business, group products provided a boost to life premium volumes in the second quarter.

Total life direct premiums of $46.71 billion represented growth of 5.1% year over year, which marked the industry's fastest rate of expansion since the fourth quarter of 2017. Growth in ordinary life premiums increased to 3.2% in the second quarter from 2.4% in the first quarter. Group life business spiked by 12.2% as compared with growth of 3.6% in the first quarter.

Much like the group annuity business, group life premiums tend to be lumpy, and growth rates, in the past, have been impacted materially by large, one-off bank-owned and corporate-owned life insurance transactions.

Of the 22 individual entities that had $100 million or more in group life premiums in the second quarter, three more than doubled their writings on a year-over-year basis: Massachusetts Mutual Life Insurance Co., Nationwide Life Insurance Co. and Zurich American Life Insurance Co.

Several leading ordinary life providers also experienced particularly rapid growth in the second quarter, though not to the level observed in the group life business. Northwestern Mutual Life Insurance Co., for example, generated 12.4% growth in ordinary life premiums in the second quarter, its fastest rate of expansion since the fourth quarter of 2010.

The second quarter results tracked well ahead of S&P Global Market Intelligence's full-year projections for growth of 2.9% in ordinary life premiums and 3.5% in group life premiums.

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