A.M. Best revised its rating outlook for the U.S. life/annuity sector to stable from negative, reflecting its view that rating actions are not expected to move profoundly in one direction. The rating agency has observed favorable trends pertaining to credit spreads, asset impairments, balance sheet and product de-risking, access to the capital markets and overall risk management. To a large extent, substantial unrealized loss positions in general account investment portfolios have recovered as of Q1 2010.

Several life insurers have successfully raised capital through debt and equity issuances to fund near-term maturities, decrease leverage, reduce reliance on short-term funding (such as commercial paper or bank debt), and/or contribute capital to their operating subsidiaries, A.M. Best says. This has helped facilitate the substantial increase—greater than 20%—in the industry’s absolute capital from Q1 2009 to Q1 2010.

Additionally, life and annuity companies have curtailed or de-emphasized sales of products that are more capital intensive, such as institutional spread-based products, no-lapse universal life and fixed annuities.

A.M. Best will continue to evaluate each company’s performance on an individual basis, and react accordingly.

Challenges remain for the life/annuity segment, the rating agency says. Although operating earnings have generally improved, recent results remain below pre-crisis levels. Individual life insurance sales, after experiencing the largest year-over-year decline on record, remain sluggish as application activity has essentially been flat through the first part of 2010. The ongoing trend toward offering simpler variable annuities in conjunction with higher pricing and less generous guaranteed living benefit riders has tempered new sales growth, despite strong equity market performance in 2009.

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