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Fitch stays negative on US life

4th December 2020 - Author: Matt Sheehan

Fitch Ratings has maintained its negative outlook on the US life insurance industry for 2021 due to ongoing concerns about the economic fallout from the COVID-19 pandemic.

negativeAnalysts explained that the economic shock could cause deterioration in key credit metrics over the next one to two years.

“Fitch’s negative rating outlook for U.S. life insurers reflects our assumptions regarding the economic fallout from the coronavirus pandemic” said Doug Meyer, Managing Director.

“The negative outlook is sensitive to potential revisions in those assumptions subject to further clarity on the pandemic-related economic impacts and risk of a resurgence of the virus, and could remain in place well into 2021.”

Fitch forecasts ongoing deterioration in asset quality due to credit migration and increased defaults, as well as and concern over the sharp unexpected decline in interest rates in 2020.

While prolonged low interest rates are expected to bleed into reported earnings over time, low interest rates will likely have a more immediate impact reserve and capital adequacy.

Variable annuities (VA) represents a large business for US life insurers in which approximately 60% of accounts include guaranteed living benefits that are sensitive to capital market performance.

But Fitch warns that divergence between emerging experience and policyholder behaviour assumption could increase required reserving for this product line and a corresponding hit to statutory capital.

Lastly, key regulatory developments that could impact the market include the extension of regulatory forbearance on mortgage loan payments and related risk-based capital treatment, and approvals for in-force LTC premium rate increase requests.

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