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Tough comparison leads to lower Q3 US life industry pretax operating profit

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Tough comparison leads to lower Q3 US life industry pretax operating profit

Amid continued pressure on premium writings and investment yields, difficult comparisons resulting from the accounting for various Prudential Financial Inc. intercompany transactions were primarily responsible for the U.S. life insurance industry's decline in third-quarter statutory profitability.

The movement of material amounts of business into and out of the U.S.-domiciled entities that file annual and quarterly statements with the National Association of Insurance Commissioners has been a regular feature of statutory income statements in recent years, and the third quarters of 2016 and 2017 were no exception.

Total-filed statutory results compiled Dec. 12 by S&P Global Market Intelligence, which are subject to change, show that pretax operating income, or the net gain after policyholder dividends but before income taxes, tumbled by 23.5% year over year to $17.49 billion. But after excluding Prudential's results, which showed a drop of $4.06 billion on a year-over-year basis in pretax operating profits, the retreat amounted to only 7.4%. The exclusion of Prudential also made the difference between a 23.8% decline in the industry's after-tax net income and an increase of 3.3%.

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The recaptures of risks related to variable annuities with living benefit guarantees during 2016 by Prudential Annuities Life Assurance Corp. and Pruco Life Insurance Co. involved Pruco Reinsurance Ltd., an entity outside of the scope of statutory data. In the third quarter of 2017, Pruco Life disclosed in its 10-Q that it recaptured the risks related to certain universal life policies with no-lapse guarantees that it had previously reinsured to another affiliate that does not file annual or quarterly statements with the NAIC. It subsequently reinsured those and certain other universal life policies to another such affiliate.

Pruco Life's third-quarter pretax operating loss of $860.5 million compared to a profit of $61.2 million in the year-earlier period, reflecting a sharply higher increase in aggregate reserves and a large negative entry in the reserve adjustment for reinsurance ceded line item of its income statement. Pretax operating income at Prudential Annuities Life, meanwhile, plunged to $1.34 billion from $4.17 billion in the year-earlier period, reflecting the nonrecurrence of a large negative entry in the increase in aggregate reserves line item.

The Prudential group was not alone in seeing a large year-over-year decline in statutory profitability, but its retreat was by far the most significant. The U.S. life group led by Allianz Life Insurance Co. of North America saw its pretax operating result slide to a loss of $522.1 million in the third quarter from a profit of $418.7 million in the year-earlier period. The group led by Jackson National Life Insurance Co. experienced a $692.5 million year-over-year decline in pretax operating income. Both groups, which traditionally rank among the nation's leading annuity writers, had double-digit percentage declines in net premiums and considerations during the third quarter — a period in which annuity sales were historically sluggish.

The industry generated a 2.4% decline in net premiums and considerations during the third quarter on a total-filed basis and 0.9% when excluding Prudential. It represented the fourth year-over-year decline in the past five quarters owing to factors such as generally unfavorable comparisons in direct annuity considerations and increasingly higher aggregate levels of ceded premiums relative to assumed premiums.

A modest increase in net investment income earned helped partially mitigate the impact of lower net premiums and considerations. But while the industry's net yield on invested assets increased by 1 basis point from the third quarter of 2016, it fell 5 basis points from the second quarter's result and remained near a historic low at 4.49%.

The groups led by John Hancock Life Insurance Co. (USA) and Northwestern Mutual Life Insurance Co. produced two of the industry's largest positive year-over-year changes in pretax operating income. John Hancock's pretax operating income increased to $874.4 million from $491.8 million. Northwestern Mutual generated a pretax operating profit of $145.5 million as compared with a rare loss of $180 million in the year-earlier period. That stands as only the second quarterly pretax operating loss that group has produced since the start of 2010.

A cursory glance at the adjusted industry results suggests that a sharp increase in the amount of other expenses was primarily responsible for the dip in operating income. Of the $11.43 billion in other expenses attributable to the industry, excluding Prudential, Genworth Financial Inc.'s Genworth Life & Annuity Insurance Co. was responsible for $9.09 billion as both it and Genworth Life Insurance Co. had several extraordinary results across their profit and loss accounts resulting from transfers of business associated with a corporate unstacking strategy to place life and annuity business in one subsidiary and long-term care business in the other.

The Genworth group, on a consolidated basis, had a marginal impact on U.S. life industry profitability as the accounting for the unstacking transactions largely offset among the individual entities. Genworth Life & Annuity offset the extraordinary amount of other expenses with nearly $8.99 billion in net premiums and considerations. Genworth Life had a $9.08 billion reserve adjustment on reinsurance ceded and a negative $8.27 billion in net premiums and considerations. When excluding Genworth and Prudential, for example, the other expenses line was essentially unchanged on a year-over-year basis for the rest of the industry.

Total underwriting deductions, when subjected to the same exclusions, also held virtually steady on a year-over-year basis leaving a 1.3% decline in net premiums and considerations to shoulder the responsibility for the balance of the industry's decline in pretax operating income.