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Strong 2018 presents high bar for 2019 US life and annuity premium growth

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Strong 2018 presents high bar for 2019 US life and annuity premium growth

A surge in sales of individual annuities and the magnitude of one group annuity contract will lead to growth in total life, accident-and-health and annuity direct premiums and considerations above S&P Global Market Intelligence's original expectations for 2018.

Those developments will make for much more difficult comparisons in certain business lines, however, resulting in a slight downward revision to an outlook for 2019 expansion that had already contemplated a reduced pace of growth.

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S&P Global Market Intelligence now projects growth of 6.4% in direct premiums and considerations on an industrywide basis, excluding select entities that conduct the majority of their business outside of the United States, up from an original forecast of 4.3%. For 2019, the revised outlook calls for expansion of 2.7%, which represents a decline of 20 basis points from the original projection. The revisions are based on a variety of factors, primarily an analysis of trends in direct premiums and considerations as reported on Exhibit 1 of quarterly statutory statements as well as individual company commentary, third-party industry sales surveys, and the release of new information regarding certain activity that we previously considered in our original outlook.

Historically strong individual annuity sales

Survey data compiled by the LIMRA Secure Retirement Institute found an 11% increase in sales of individual annuities during the first three quarters of 2018, fueled by growth of 18% in fixed annuities. The firm characterized third-quarter sales of fixed indexed annuities, which totaled $18 billion, as a new quarterly record. Variable annuity sales rose by 4% year over year during the first nine months of 2018 and by 11% in the third quarter, suggesting that a stretch of six consecutive years of annual declines will come to an end.

The strength in new production, which LIMRA credited in part to rising interest rates, also reflected an easy comparison. Uncertainty surrounding the status of the U.S. Department of Labor's fiduciary rule contributed to especially anemic sales in the second half of 2017. Sales of individual annuities fell to what LIMRA described as a 15-year low in the third quarter of 2017.

While quarterly statutory statements provide only high-level information about annuity premiums, the data contained in the Sept. 30, 2018, round of filings showed similar signs of strength from a directional perspective.

Ordinary individual annuity direct premiums and considerations soared 25.9% year over year on an adjusted basis to $52.55 billion in the third quarter. That was the highest growth rate for that business line in any period since the first quarter of 2011. The anemic premium volume achieved in the third quarter of 2017 was the lowest for the industry in any period since the first quarter of 2010 when insurers and annuitants alike were still feeling the effects of the global financial crisis.

Three consecutive quarters of year-over-year growth have followed a seven-quarter stretch of declines, and the industry has yet to return to the quarterly business volumes of $53.08 billion and $54.13 billion, respectively, it achieved in the final two quarters of 2015.

The revised full-year 2018 outlook for growth in ordinary individual annuity direct premiums and considerations of 12.8% not only exceeds the original forecast for expansion of 4.8%, it also outpaces the actual growth rate of 11.5% for the first three quarters of 2018. Our optimism is based upon an expectation that premium volumes will top $52 billion for a third straight quarter in the fourth quarter, which would imply year-over-year expansion of 16.8%.

Our revised 2019 outlook for growth of 2.7%, up from 2.2% previously, reflects a variety of factors, including upbeat recent commentary about sales trends and product initiatives by leading annuity writers as well as the prospect for a return to moderately higher growth in ordinary life business. Though we do not expect growth in annuity business to approach 2018 levels as a result of a much more challenging year-over-year comparison, we expect writings to increase modestly.

It has been since 2015 that ordinary individual annuity premiums and considerations have increased on a year-over-year basis. Not since 2011 have they grown by a double-digit percentage in a full calendar year. Expansion at the projected 2018 rate would be the highest the industry has achieved since 2002.

Large transactions affect group premiums

Several distinct contracts appear to have affected group life and annuity premiums to an even greater extent than our initial outlook anticipated.

S&P Global Market Intelligence originally projected that group annuity direct premiums and considerations would rise by 3.5% in 2018, anticipating a boost from an agreement announced in May whereby MetLife Inc.'s Metropolitan Life Insurance Co. said it would provide annuity benefits to certain FedEx Corp. retirees and beneficiaries with associated pension obligations of approximately $6 billion.

The insurer billed the deal as the largest U.S. pension risk transfer transaction by premium in the past five years. It would later disclose in its quarterly report on Form 10-Q for the second quarter that it received $6 billion in revenues from one customer in its U.S. segment in the form of a single premium for a pension risk transfer. Metropolitan Life, meanwhile, reported group annuity direct premiums and considerations of $7.64 billion in the second quarter: an amount that exceeded its tally for the first three quarters of 2017, combined. Its premium volume in the business line totaled $2.07 billion and $2.76 billion in the first and third quarters of 2018.

With group annuity business volume up by 8.8% on a year-over-year basis through Sept. 30, our full-year 2018 growth outlook has increased to 6.2%. For 2019, we expect that the higher base of writings in 2018 will make for a more difficult comparison, and we lowered our growth outlook to 0.6% from 2.4% previously.

It will not be the first time that large pension risk transfers have created significant volatility in group annuity growth rates. Direct premiums and considerations in the business line spiked 34.1% in 2012 then tumbled 26.8% in 2013 as a result of two massive deals entered by Prudential Financial Inc.

Large swings in group life premiums from year to year are not uncommon: annual rates of change have ranged from a decrease of 21.8% to an increase of nearly 10% during the previous decade.

A very large bank-owned life insurance contract issued in the third quarter of 2017 by Zurich American Life Insurance Co. and a significant bump in second-quarter 2017 group life premiums for Nationwide Life Insurance Co., which reported a surge in corporate-owned life insurance business during the full year, do not seem to have been repeated in 2018.

Adjusted direct group life premiums tumbled by 6.1% on a year-to-date basis through Sept. 30. S&P Global Market Intelligence originally projected that group life premiums would remain nearly flat for full-year 2018 with growth of less than 0.1%.

Year-to-date business volume when excluding the Zurich and Nationwide life groups increased by less than 0.4%, however, providing only a very modest partial offset to their difficult-to-replicate comparisons from the first three quarters of 2017. Nationwide Life and its affiliates produced group life direct premiums written of $506.2 million on a year-to-date basis, marking a decline of 27%. Zurich's group life premiums plunged 96.7% to only $58.2 million.

Assuming no repeat of the Nationwide Life group's outsized group life premium volume of $704.3 million in the fourth quarter of 2017 in the closing three months of 2018, our revised industry projection calls for a full-year decline that exceeds that of the first three quarters at 7.7%. With the lower comparison from 2018, we now anticipate group life premiums to increase by 3.3% in 2019 as compared with an original projection for expansion of 2.9% off of a higher base.

Lower life premiums

The sluggishness in premium volume was not exclusive to the group portion of the life insurance business. At 1.6%, growth in direct ordinary life premiums fell to its lowest level for the first three quarters of a year since 2014. The third quarter's year-over-year growth rate of 0.6% was the slowest for the industry since the fourth quarter of 2015.

The groups led by Northwestern Mutual Life Insurance Co. and New York Life Insurance Co., which ranked as the largest two writers of ordinary life business in 2017, generated an increase of 0.7% and a decrease of 0.3%, respectively, in premiums in that line during the first three quarters of 2018. For New York Life, it was the first decline in ordinary life premium volume in the first nine months of a year since 2012.

LIMRA's survey data showed growth in annualized premiums across products of 1% on a year-to-date basis through Sept. 30 with the face amount of policies unchanged and the number of policies down by 1%. Trends varied widely by type of policy, however, with the face amount of universal life policies down by 12% on a year-to-date basis, but the face amount of variable universal life policies up 8%.

Our revised outlook for growth in ordinary life direct premiums of 1.7% marks a decrease from an original forecast of 2.4%. For 2019, the expected rate of expansion of less than 2.4% remains virtually unchanged.

Across both the ordinary and group life lines, the revised 2018 projection calls for a decline of 0.4%, down from less than 1.9% as originally issued. That more pessimistic view is more than offset by the significant higher forecasts for annuity growth. Our outlook for the accident-and-health lines remains unchanged.