U.S. life insurers saw their annuity business shrink for the first time in three years in 2016.
Yearly annuity considerations, or the premiums customers pay for their annuities, fell on an industrywide basis in 2016, with a drop in ordinary considerations outweighing a slight rise in group considerations.
Life insurers' year-over-year ordinary and group annuity considerations shrunk 2.31% in 2016. Within that total, group considerations rose 1.83%, but ordinary considerations fell 4.86%.
In recent years, insurers have benefited from companies transferring their pension liabilities through the purchase of group annuities. The industry generated $13.7 billion in U.S. single-premium pension buyout sales in 2016, according to the Life Insurance and Market Research Association. That figure was the second-highest total the organization has on record.
LIMRA reported more than 383 group annuities purchased in 2016, with many of the sales coming from relatively small plans. WestRock Co.'s contract with Prudential Financial Inc. was the largest at $2.50 billion.
Prudential Financial had $21.76 billion in total annuity considerations for the year, the highest in the industry based on an S&P Global Market Intelligence analysis. Still, that figure was down 1.39% from 2015, driven primarily by a 10.41% drop in ordinary annuity considerations in 2016.
During the company's fourth-quarter earnings call, CEO John Strangfeld said product diversification prevented the company's year-over-year variable annuity sales from declining as much as peers' did in 2016.
"But we're not immune to broader industry pressures, including the impact of regulatory uncertainty," he said, according to a transcript.
Some of that uncertainty may be attributed to the Department of Labor's Conflict of Interest Rule, often referred to as the fiduciary rule, which it approved in April 2016. The rule was designed to create a fiduciary responsibility to investors for financial retirement advisers, a stricter standard than the current "suitability" standard. The rule would appear to disfavor the comparatively high costs and complexity of some annuity products.
Though the rule was scheduled to be phased in April 10, the administration of President Donald Trump has moved to delay the rule's applicability date by 60 days to give it time to review the rule's impact on the industry and consumers.
Lincoln National Corp., which for the first time since 2003 is not ranked in the top 10 by annuity considerations, posted a year-over-year decrease of 21.30% in total annuity considerations in 2016.
Other major insurers in the variable annuity space posted large year-over-year decreases. U.K.-based Prudential Plc's U.S. unit Jackson National Life Insurance Co. fell two spots to No. 3 and saw a drop of 23.81%, or $5.86 billion in total considerations. Netherlands-based AEGON NV saw an aggregate decline of 17.89%, including a sharp 43.13% decrease in ordinary annuity considerations in 2016.
Companies with large fixed-annuity businesses have seen growth in their considerations. One such insurer, New York Life Insurance Co., jumped three spots to No. 4 with $16.82 billion in considerations, an increase of 7.13% compared with 2015.
Methodology behind the rankings
The ranking includes SNL groups and companies independent of a group. To address the impact of foreign currency conversions for entities with a significant amount of business written outside the U.S., SNL adjusted the rankings to exclude such entities. As a result, American Life Insurance Co. (DE) and American Family Life Assurance Co. of Columbus were excluded, affecting the rankings of SNL groups MetLife and Aflac.
Ordinary annuities refer to fixed and variable annuities sold to individuals. Group annuities include investment options typically available in tax-advantaged savings accounts and guaranteed investment contracts.
SNL uses statutory total annuity considerations to determine market share. Total annuity consideration is a preferred indicator of market share as it not only reflects new business but also the persistency of a company's existing business in the form of renewal annuity considerations. Additionally, many policyholder acquisition costs are not recovered within one year. As such, total annuity considerations can also be a better indicator of profitability for life insurers, whereas new sales do not necessarily equate with profitability.