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Fitch turns negative on North American life insurance

5th December 2019 - Author: Matt Sheehan

Fitch Ratings has revised its 2020 sector outlook for North American life insurers to negative from stable, following an unexpected decline in interest rates over the past year.

Declining reinsurance profitsAlthough the sector outlook is negative, analysts still expect ratings for North American life insurers to remain stable in the coming year.

That said, the rating agency warned that a large unexpected market shock could still put stable ratings at risk.

This scenario is viewed as inevitable at some point due to slowing economic growth, macroeconomic uncertainty tied to global trade and monetary policy, and late cycle credit market conditions.

“The recent return to lower interest rates will define 2020 for North American life insurers,” said Doug Meyer, Managing Director at Fitch.

“While low rates will bleed into earnings over time, they affect our view of reserve and capital adequacy more immediately,” he explained.

“Further, sustained low rates raises the risk that insurers overreach for yield in ways that increase vulnerability to a large unexpected market shock.”

In addition to interest rate changes, Fitch has identified a spike in high yield default rates, long term care (LTC) reserve charges, and regulatory and accounting developments as key issues to watch over the next year.

While the relatively benign credit environment is expected to continue in 2020, corporate defaults are projected to rise slightly.

Moreover, life insurers have increased their exposure to ‘BBB’-rated bonds – those on the cusp on sub-investment grade – and to investment-grade CLOs with exposure to leveraged loans, putting their investment portfolios at risk in a credit downturn.

Within the LTC insurance space, Fitch continues to believe that statutory reserving is based on overly aggressive assumptions and therefore insurers will continue to take reserve charges.

And finally, Fitch is watching regulatory and accounting issues and developments, including proposed changes to statutory reserving and capital framework for variable annuities, proposed LTC premium rate increases, and the NAIC’s use of private letter ratings.

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