A sizable increase in ordinary individual annuity premiums was accompanied by an even larger increase in aggregate reserves, leading U.S. life insurance industry statutory pretax operating income to tumble to a seven-year low in 2018.
A variety of factors affected the year-over-year comparison, including mergers and acquisitions and affiliated reinsurance transactions that closed in both 2017 and 2018. Pretax operating income in 2018 of $44.65 billion marked a decline of 28.9% from 2017 levels as growth in total benefits and losses of 12.5% outpaced the 7.6% expansion in total revenues.
Net income declined at a slower rate, with 2018's $41.66 billion down 17.5% year over year due to a sharp decline in federal and foreign income taxes incurred. In the first full year of U.S. federal tax reform, those U.S. life insurers that reported positive amounts of income taxes incurred and pretax operating income posted an effective tax rate of just under 12% as compared with 21.6% in 2017 and a minimum of 17.7% during the previous 15 years.
Industry results for all periods referenced in this article reflect the aggregation of select annual statutory statement disclosures for 322 U.S. life groups and stand-alone entities for which 2018 data was available as of March 21. Due to that adjustment, results for all periods vary from those reported on various S&P Global Market Intelligence platforms. With the exception of the discussion pertaining to capital and surplus, the impact of supplementary contracts is excluded from the analysis.
The alleviation of the regulatory uncertainty that helped stymie sales of certain ordinary individual annuity products in 2017 dissipated in 2018, and the net effects of that development were apparent in U.S. life industry premium growth statistics.
Direct premiums and considerations across all business lines increased by 6.1%, which marked the industry's fastest expansion since 2010 when it was emerging from global financial crisis-related sluggishness. Across the ordinary individual and group annuity businesses, growth in direct premiums and considerations topped 12% on a year-over-year basis after two consecutive years of decline. The annuities growth was so strong that it mitigated a year-over-year decline of 1.4% in ordinary and group life direct premiums as well as a lower rate of increase in other and group accident and health business. It was the first double-digit percentage increase in annuity direct premiums and considerations since 2010.
The LIMRA Secure Retirement Institute on March 21 reported a 15% increase in total annuity sales in 2018, including a historical level of strength in the fourth quarter across indexed annuities, fixed-rate deferred annuities and fixed immediate income annuities. The organization described the $62.6 billion in total annuity sales during the fourth quarter of 2018 as the highest result since the first quarter of 2009.
Of the top 20 annuity companies in 2017 as determined by direct ordinary individual and group annuity premiums and considerations, all but four reported year-over-year increases in 2018. Five of 2017's top 20 produced year-over-year growth rates in excess of 30%: the U.S. life groups of Prudential Financial Inc. MetLife Inc., Athene Holding Ltd., Pacific Mutual Holding Co. and Global Atlantic Financial Group Ltd.
The rapid expansion in direct business volume did not convey on a net basis, however, reflecting faster growth in ceded premiums than in assumed premiums. Across all business lines, net premiums and considerations rose by just over 1% to $598.66 billion. They fell by 6.1% in the ordinary individual and group annuities businesses.
The U.S. life subsidiaries of American International Group Inc. and Voya Financial Inc.'s Voya Insurance & Annuity Co. led the industry with ceded annuity premiums and considerations of $18.87 billion and $17.71 billion, respectively, reflecting their roles in separate extraordinary transactions.
AIG's American General Life Insurance Co. ceded $21.70 billion to Fortitude Reinsurance Co. Ltd., the Bermuda-domiciled entity formerly known as DSA Reinsurance Co. Ltd. Cessions included certain term, whole and universal life business along with long-term care, accident and health, structured settlements, single-premium immediate annuities and pension risk-transfer annuities. Voya Insurance, meanwhile, ceded $13.42 billion to a Bermuda-domiciled affiliate of Athene as part of a broader June 2018 divestiture of its closed-block variable annuity and fixed and fixed indexed annuities business.
All else being equal, U.S. life industry net premiums and considerations would have increased by approximately 7.2% when excluding the impact of the premiums ceded under those relationships. But from a total revenue perspective, the impacts of the extraordinary transactions were offset by large positive reserve adjustments on reinsurance ceded.
A 57% year-over-year increase in the aggregate reserve for ordinary individual and group annuity business represented the primary driver of a 35.3% rise in the aggregate reserve across U.S. life business lines in 2018.
Nineteen U.S. life groups and stand-alone entities had increases in aggregate reserves that were $1 billion or more — or decreases that were $1 billion or more — than in 2017. The Protective Life Corp. group posted the largest increase in the aggregate reserve at $12.29 billion in an amount that largely reflected its role as the reinsurer of the life business of Liberty Life Assurance Co. of Boston in connection with Liberty Mutual Holding Co. Inc.'s May 2018 sale of that company to Lincoln National Corp.
Also contributing to lower pretax operating income in 2018 was a 14.3% increase in policy surrenders and withdrawals across the ordinary individual and group annuity businesses. Surrenders and withdrawals increased in those lines by 14.3%, and they rose by 13.4% across the U.S. life business.
A total of nine U.S. life groups had year-over-year declines in pretax operating income of more than $1 billion, including Prudential, Jackson National Life Insurance Co., Manulife Financial Corp.'s John Hancock companies, Voya, AIG, Aflac Inc., Swiss Re AG, Brighthouse Financial Inc. and MetLife. Two, General Electric Co. and Swiss Re, posted pretax operating losses in excess of $1 billion.
GE is the ultimate parent of Employers Reassurance Corp. and Union Fidelity Life Insurance Co., which have made headlines in recent times for their roles as reinsurers of long-term care business. The insurers' respective pretax operating losses fell to $1.51 billion and $322.4 million from $2.42 billion and $1.30 billion in 2017.
Swiss Re Life & Health America Inc. reported a pretax operating loss of $1.20 billion in 2018 as it recaptured business from a non-U.S. affiliate so as to manage the impact of the Base Erosion and Anti-Abuse Tax, or BEAT, provisions of federal tax reform. The largest portion of that loss was the $2.06 billion associated with its recapture of previously ceded level premium term life business. It offset some of the recapture-related losses later in 2018 through the retrocession of certain of the recaptured business.
With income declining across the industry, the 1.4% rate of growth in capital and surplus represented a slowdown in the pace of expansion relative to recent years. In addition to lower net income, dividends to stockholders increased to $38 billion from $28.72 billion.
A preponderance of life insurance groups and stand-alone entities also experienced declines in their company action level risk-based capital ratios in numbers last seen during the financial crisis, with 71.7% of the 327 entities ending 2018 with lower ratios as calculated by S&P Global Market Intelligence. But rather than the sort of broad pressure on capitalization the industry experienced during the crisis, the reductions had been expected as a result of the National Association of Insurance Commissioners' implementation of certain revisions to its RBC formula for life insurers to incorporate the new tax law changes.