Outsized year-over-year growth in ordinary individual annuity considerations fueled the U.S. life industry's expansion for a fourth consecutive quarter, according to a first look at March 31 statutory results.
But comparisons will become much more difficult in the second quarter as the industry laps the fixed individual annuity sales rebound that began in earnest in the second quarter of 2018 in the aftermath of a federal appeals court decision vacating the U.S. Department of Labor's Fiduciary Rule.
Direct ordinary individual annuity considerations soared more than 17.2% in the first three months of 2019 to $54.15 billion, marking the second-highest growth rate in a first quarter for the industry in that business line in the past 15 years. The analysis is based on the aggregation of results obtained through May 22 by S&P Global Market Intelligence for 656 individual life entities for which first-quarter data was available for the past two years. It excludes three entities that historically generate the vast majority of their business from outside of the United States.
Thanks to the individual annuity results, total direct life, annuity and accident and health premiums also turned in one of their best first-quarter performances in the last 15 years with a growth rate of 7.7%. Excluding individual annuity business, the growth rate of 4.2% fell just short of the pace of expansion in the previous two first quarters on the same basis. Ordinary life, group life and group annuities all exhibited growth rates exceeding the levels achieved by the industry in the first quarter of 2018. Accident and health premiums increased, but at a slower pace than in the year-ago period.
While our first look at the March 31 statutory financials focuses on direct business volume, the first quarter's net results will show an extraordinarily sharp rise in premiums and considerations that reflect the impact of previously disclosed reinsurance transactions. Direct premiums growth was, indeed, historically strong in the period, but the substantial increase in net business largely reflects the impact of large negative entries in the first quarter of 2018 for three entities. These included American International Group Inc. subsidiaries American General Life Insurance Co. and United States Life Insurance Co. in the City of New York, as premiums flowed outside the scope of U.S. statutory data.
Growth accelerates at AIG
The dramatic swing in net premiums and considerations at American General Life to a positive $4.19 billion from a negative $20 billion, notwithstanding, the first quarter got 2019 off to a rousing start for the Houston-based company.
American General Life's direct individual annuity considerations soared to $3.26 billion from $2.05 billion. Across AIG's U.S. life units, direct individual annuity considerations increased 52.7% year over year. Yet, AIG's individual annuity considerations marked only a slight increase from its volumes in the first quarter of 2016, demonstrating just how far its business had slumped in the previous two years.
"With favorable pricing conditions during the quarter, we significantly grew fixed and indexed annuity sales," said Kevin Hogan, AIG's CEO of life and retirement, during a recent conference call. AIG elaborated in its Form 10-Q for the first quarter, crediting higher broker/dealer and bank distribution sales against a strong market backdrop.
Survey data collected by LIMRA's Secure Retirement Institute showed AIG with an industry-leading fixed annuity sales volume of $3.91 billion in the first quarter, up from $2.05 billion in the year-earlier period. New York Life Insurance Co., which led the industry in that category with sales of $3.09 billion in the first quarter of 2018, slipped to second even as its volumes rose to $3.32 billion.
As impressive as AIG's implied sales growth of 91.2%, based on LIMRA survey results for the previous two first quarters, might have been, several other carriers among the top 10 individual fixed-annuity sellers expanded at high double-digit and even triple-digit rates.
Massachusetts Mutual Life Insurance Co.'s annuity sales more than doubled on a year-over-year basis, for example. Executives at Lincoln National Corp., which reported fixed-annuity sales growth of 222% in the first quarter, said the product segment generated sales gains across every distribution channel, like AIG showing particular strength in the broker/dealer and bank space.
Statutory data shows increases in direct individual annuity considerations of 31.2% on a year-over-year basis for the current members of the Lincoln National life group, including historical results for Liberty Life Assurance Co. of Boston, and 60.3% for the MassMutual group.
Not all of the leading U.S. annuity writers from the first quarter of 2018 showed year-over-year expansion, however. Direct individual annuity considerations at Ohio National Life Insurance Co. and affiliates plunged by 96.4% year over year, reflecting the group's September 2018 discontinuation of new issuance in the product segment.
Profitability picks up
Despite the impact of the aforementioned reinsurance transactions on first-quarter 2018 net premiums and considerations, it was largely offset on the industry's statutory income statement by like amounts of reserve adjustments on reinsurance ceded. Still, the life industry's pretax operating income is likely to be materially higher in the first quarter of 2019 than in the year-earlier period.
Ten individual U.S. life entities reported increases in pretax operating income of $500 million or more, and four of those comparisons exceeded $1 billion. Only three entities had negative year-over-year comparisons of $500 million or more.
Swiss Re Life & Health America Inc., which posted an industry high $3.74 billion year-over-year swing in pretax operating income, recorded a large net gain associated with the restructuring of its intragroup retrocession programs. The restructuring involved the Swiss Re company recapturing certain life, annuity and accident and health business, then retroceding it.
Berkshire Hathaway Inc.'s Berkshire Hathaway Life Insurance Co. of Nebraska credited the resolution of a dispute with Swiss Re Life & Health America over coinsurance and stop-loss agreements for the lion's share of a year-over-year increase in pretax operating income of $1.30 billion in the first quarter.
Jackson National Life Insurance Co. and Prudential Financial Inc.'s Prudential Annuities Life Assurance Corp. also had positive changes in pretax operating income in excess of $1 billion.
At a high level, lower increases in aggregate reserves, a more muted effect from net transfers to separate accounts and a decline in surrenders contributed to the industry's higher levels of operating profitability.
Strength on strength?
Lincoln National President and CEO Dennis Glass, speaking during a recent call, spoke optimistically about company's annuity sales outlook, expecting it to generate growth in the segment that exceeds the industry average "over the next couple of years." He observed a shift subsequent to the first quarter's end wherein Lincoln National's sales mix shifted more towards variable annuities from what had been about a "50-50" split in January.
The company's sales of variable annuities, overall, declined by 5.4% in the first quarter, though trends were decidedly mixed between products with and without guaranteed living benefits. Sales of the latter type of variable annuity surged by 47.2% in the period; the former experienced a 26.7% retreat.
LIMRA survey data showed a 7.3% decline in variable annuity sales in the first quarter. The organization reported that fixed annuity sales had outpaced variable annuity sales in 11 of the past 13 quarters.
But amid continued enthusiasm about the potential for growth in sales of fixed and indexed annuities, the year-over-year rates of expansion in direct individual annuity considerations seem certain to slow.
The cloud of regulatory uncertainty cast upon the segment by Fiduciary Rule-related matters contributed to seven consecutive quarters of sub-$50 billion direct individual annuity considerations for the industry from the third quarter of 2016 through the first quarter of 2018. That, in turn, created a series of relatively easy comparisons from a growth perspective as the industry's sales rebounded ranging from 17.2% in the first quarter of 2019 to 24.8% in the third quarter of 2018.
Starting with the second quarter of 2019, however, the bar will be raised. Even to the extent direct individual annuity considerations were to increase by 10% on a sequential basis between the first and second quarters of 2019, the second quarter's year-over-year rate of growth would slip to 14.3%. Were considerations to hold steady at the first quarter's level, they would rise by only 3.9%.
Momentum in other lines may help cushion the blow from slower individual annuity growth. The period ended March 31 marked the first time in four quarters that direct premiums and considerations increased across all major product lines: ordinary and group life, individual and group annuities, and other and group accident and health. Among those lines, however, only the ordinary life growth rate rose sequentially between the fourth quarter of 2018 and the first quarter of 2019.