Best’s Special Report: Smaller Companies Face Cash Flow Crunch from Uptick in U.S. Life/Annuity Surrenders

The value of surrendered annuity policies among U.S. life/annuity (L/A) writers increased 19% through the first half of 2024, compared with the same prior-year period, according to a new AM Best report. However, premium growth held steady at 21% through the same timeframe, with individual annuity premium notching its 14th consecutive quarter of year-over-year growth.

In a newly released Best’s Special Report, AM Best notes that while the Federal Reserve reduced interest rates by half a point in September 2024, they remain nearly twice the level of five years earlier. The higher interest rates are an issue not experienced in the L/A industry in decades. This creates the potential for disintermediation risk— the possibility that a policyholder may surrender a policy in favor of another one or an asset yielding a higher interest rate. The report notes that competition has remained generally rational, with no significant widespread race to undercut competition to spur growth.

Surrender benefits topped $100 billion for the fifth straight quarter and sixth in the last seven quarters, compared with an average of $86 billion prior to that dating back to 2019. Additionally, annualized surrenders as a share of reserves for the past three quarters are higher than at any other time going back to 2019. “Surrender benefits as a percentage of premium, including individual and group annuity and individual life, are at their lowest levels since at least 2019, which reflects strong premium growth,” said Kaitlin Piasecki, industry research analyst, AM Best.

Companies unable to replace surrendered business are most likely to see a shrinking asset base, as maturing bonds may be used to cover additional surrenders instead of being reinvested. The annuity market is highly competitive, with the higher interest rate environment leading to many new entrants, some without the burden of needing legacy system upgrades, as well as companies backed by private-equity and investment management firms that can leverage sophisticated investment expertise.

On a cash flow basis, companies in AM Best’s individual annuity composite have observed a downward trend much steeper in the ratio of premium cash flow in to benefits & surrenders cash flow out than reported at individual life and diversified companies in multiple lines. When the individual annuity composite is viewed by premium scale, those smaller companies have seen the greatest deterioration in the cash flow ratio, with incoming premiums not covering benefits and surrenders flowing out. The percentage of smaller companies with negative cash flow from operations has been trending up to a greater degree than for medium size and larger organizations, indicating possible shifts in market share. “Negative cash flows could lead to the selling of assets at unrealized loss positions, as higher interest rates have depressed bond values,” said Jason Hopper, associate director, AM Best.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=348358.

To view a video with Jason Hopper and Kaitlin Piasecki, please visit https://www.ambest.com/video/video.aspx?s=1&rc=piaseskihopper1124.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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