Best’s Special Report: U.S. Life/Annuity Benchmarking Analysis Shows Link Between Quality of Assets, Unrealized Loss Impacts

AM Best benchmarking analysis of rated U.S. life/annuity (L/A) insurance companies showed that those insurers with higher quality investments fared better in uncertain market conditions during the first three quarters of 2022 that saw a sharp increase in unrealized losses.

The Best’s Special Report, “Life/Annuity Benchmarking: 2022 Unrealized Losses Exceed Early Pandemic,” states that insurers whose quality of assets were assessed as negative under the balance sheet strength assessment experienced a higher percentage of unrealized losses to surplus. Unrealized losses came to 5.3% of surplus for companies with a quality of assets assessment of negative, while companies whose quality of assets was assessed as positive saw unrealized losses come to less than 1% of surplus.

“Unrealized losses underscore the importance of favorable liquidity and asset-liability matching,” said Helen Andersen, industry analyst, AM Best. “During the prolonged low interest rate environment, L/A insurers extended the maturities of their bond portfolios to bolster yields. However, longer maturities are now a disadvantage as interest rates rise, because insurers must wait longer to reinvest the proceeds at the new higher rates.”

Benchmarking is an essential element in AM Best’s rating process, as it allows for comparisons of the performance of a rating unit to its peers, composites and the industry. AM Best uses a variety of benchmarking techniques to view companies from different perspectives, allowing for comparisons of absolute results and volatility levels across the industry. In noting that life insurance premiums, which grew to pandemic-driven historical highs, were now normalizing, the report states that life premium growth in 2021 was not uniform and could be viewed through rated insurers’ operating performance assessment results. According to the analysis, those insurers with an operating performance assessment of very strong saw the highest growth rates in 2021.

“Those companies with operating performance assessments of strong or better had advantages during the pandemic that aided in growth, such as nationwide distribution or more abilities in selling in a remote lockdown environment. Companies with worse operating performance assessments already were experiencing worse mortality and cutbacks on production,” said Andersen.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=330876.

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 London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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