Fitch Ratings has revised its rating outlook for the US life insurance industry to stable from negative, citing the economic impact of COVID-19 and its effect on credit quality .
Analysts note how that, when uncertainty about the implications of the coronavirus pandemic peaked in 2020, almost 30% of ratings assigned to US life insurers had a Negative Outlook or were on Negative Watch.
As of today, that number has fallen to less than 5%.
“Fitch’s stable rating outlook for U.S. life insurers reflects the improved macroeconomic environment and reduced concerns regarding asset quality deterioration within general account investment portfolios,” said Douglas Meyer, Managing Director.
“Longer-term concerns include continued low interest rates pressuring reserve adequacy and earnings on legacy in-force business and sales of interest-sensitive products. Exposure to commercial real estate (CRE) investments could also be an issue.”
Fitch expects a continuation of the current strong economic backdrop for the balance of 2021 and into 2022 and has lowered its forecast for high yield bond and institutional loan default rates.
The macroeconomic environment has benefited from favorable capital market access, government stimulus and progress on coronavirus vaccinations. Accordingly, Fitch has lowered expectations for investment losses and credit migration.
Furthermore, Fitch expects prolonged low interest rates will bleed into reported earnings over time.
However, low interest rates are expected to continue to pressure reserve and capital adequacy and increase concerns that life insurers will overreach for yield.
Fitch also expects M&A activity to remain robust, driven by a combination of factors, including low interest rates, strategic shifts away from capital market-sensitive businesses, and pressure from shareholders.
It’s reported that recent increases in M&A activity have come in the form of block reinsurance transactions, legal entity sales, and company acquisitions.
Fitch says this reflects the increasing role of alternative investment managers in the US life insurance industry.
