Global ratings agency A.M. Best has revised its market segment outlook on the U.S. life/annuity segment to negative from stable, driven by the significant volatility and uncertainty in the financial markets as a result of the ongoing COVID-19 virus.
The two main drivers of the revision to negative are the material acceleration of a global economic slowdown and the rapid and further deterioration in the U.S. economy combined with its direct impact on both equities and interest rates.
Previously, the ratings agency had said that the benign credit landscape could begin to show some cracks in 2020, but that for the majority of carriers this would be manageable. However, the financial markets have responded quickly and negatively to the COVID-19 outbreak, with increased uncertainty around the longer-term economic impact.
Ultimately, A.M. Best expects that the operating performance of the U.S. life/annuity market will move to the negative as sales decline and spread compression intensifies on the back of deteriorating interest rates and the challenged equity markets.
Another challenge for the sector driven by the virus outbreak concerns innovation, with the ratings agency expecting COVID-19 to have a significantly negative impact on the marketplace’s ability to “quickly move forward with costly innovation efforts.”
“Factors moderating these negatives include the industry’s strong capitalization and improved liquidity; stress testing that has better prepared the industry for downturns from economic and pandemic-type events; and credit spread widening to offset some of the interest rate decline,” says A.M. Best.
The impact of the COVID-19 outbreak is wide-reaching and significant, and the reality is that much uncertainty is ahead for industries of all shapes and sizes.