Profits rose by over 20% at U.S. life insurance companies last year, and Moody’s Investors Service says that it sees more growth ahead as the global economic outlook brightens and downside risks diminish.
The rating agency reports that the life insurers it rates recorded collective net income of approximately US$20 billion for 2013, which represents an increase of 22% compared to the previous year. And, it attributes that growth to stronger equity markets and asset prepayment activity that boosted fee income and investment income, respectively.
Moody’s also says that continuing profitability is likely to be driven by equity market levels, and that rising interest rates will ease spread compression, improve life investment returns, and reduce the need to increase statutory reserves. For example, it notes that rising interest rates boosted fixed annuity sales by 23% in 2013, although variable annuity sales were down by about 15% as life insurers reduced benefits and increased pricing.
Aggregate operating earnings also increased by 15% in 2013 to $29 billion, Moody’s says, “boosted by greater fee income, positive net underwriting experience and higher asset prepayments and alternative asset returns.”
Moody’s expects that industry profitability will likely continue to grow in 2014, “given a more positive global economic outlook and fewer disruptions expected for U.S. fiscal policy through early 2015.”
“Diminished downside risks and an improving economy will encourage discretionary spending by U.S. households, translating into higher life and annuity premiums and deposits to pension plans,” it adds.