Moody’s Investors Service released its annual report which shows the 2021 outlook for US life insurance remains negative.
Due to the current macroeconomic conditions, the outlook is likely to continue into next year despite the gradual recovery of the global economy.
Companies are still exposed to potential deterioration in the credit markets as well as a drag on earnings from low interest rates.
Moody’s Vice President Michael Fruchter commented: “There are downside risks and upside drivers to our baseline forecast of a continuation of the current US recovery.
“We assume that an effective vaccine is unlikely to be available widely before the middle of 2021, and until then robust pandemic management will be essential for sustaining a steady economic recovery in the US.
“The earlier distribution of an effective vaccine is a potential upside to our scenario, as is continued sizeable fiscal and monetary policy support.”
US life insurers entered the global pandemic and subsequent economic shock on solid footing. The industry has had a strategic emphasis on risk management as well as strong capital levels.
Moody’s noted that these robust capital levels have been supported by the rebound in equity markets, along with effective hedging programs to mitigate the effects of low interest rates.
However, there is a potential of more pressure being put on the industry as there is a rise of downturn in the equity markets, along with persistently low interest rates, elevated mortality claims and heightened credit risk.
Historically low interest rates, particularly at the long end of the curve, are credit negative for the US life insurance sector, and are anticipated to affect insurers’ earnings over time, reducing interest-sensitive product earnings because of spread compression, which is prevalent in the already sizeable blocks of the industry’s liabilities at minimum guaranteed rates.
Low interest rates and the pandemic are accelerating the changes to the life insurance industry, and the pace of transactions has picked up as life insurers are increasingly motivated to shed interest-sensitive legacy books.
