INSURASALES

AM Best: Rising Individual Annuity Surrenders Impact Profitability

The latest AM Best report highlights a significant impact on the individual annuity sector due to increasing surrender activity, which led to a 27% decrease in pre-tax net operating profitability in 2024. Surrenders rose 21% to $280 billion, influenced by higher interest rates and policyholder movements toward better-performing products, reducing the industry’s net operating gain from $20.5 billion in 2023 to $14.9 billion in 2024.

Nearly half of the industry’s individual annuity reserves are now protected by surrender charges or are non-surrenderable, up from an average of 37% during 2014-2021, indicating changing risk dynamics and liquidity constraints in the sector. Despite solid annuity sales in 2024, driven by variable annuity products such as Registered Index-Linked Annuities (RILAs), competitive pressures have escalated, with private equity and asset manager-owned insurers entering the market aggressively. These entities play a pivotal role in shifting reinsurance reserves offshore, primarily to affiliated reinsurers, which has increased by 86% in the past five years. This offshore reinsurance activity, while beneficial for capital and tax management, is noted by AM Best as reducing transparency and posing credit risks.

The report also identifies a trend where private equity and asset manager-owned insurers exhibit higher allocations to less liquid and less transparent assets such as private placements, asset-backed securities, and private credit instruments, which carry elevated risk premiums. Looking ahead, annuity companies face headwinds as investment yields decline and equity markets experience volatility amid economic uncertainty at the start of 2025, potentially pressuring future profitability and capital management strategies. This analysis offers valuable insights for insurance professionals monitoring operational performance, capital dynamics, and emerging risks in the individual annuity market segment.