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Fitch turns negative on US life due to virus concerns

17th March 2020 - Author: Matt Sheehan

Fitch Ratings has revised its rating outlook for the US life insurance industry from stable to negative, due to increased concerns about the coronavirus outbreak and its potential impacts on the credit quality of life insurers.

Analysts explained that the outlook revision reflected greater uncertainties about disruptions in the financial markets, which could last for an extended period of time.

The industry is also exposed to a spike in mortality risk, although Fitch noted that the severity of this remains highly uncertain.

In the near term, the deterioration in the equity market and decline in interest rates is expected to pressure life insurers’ earnings, reserves and capital.

And longer term, Fitch sees potential for a sustained disruption in the broader economy that could cause deterioration in the credit markets, leading to increased bond and loan defaults and further pressure on statutory capital levels.

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Financial market disruptions could affect the industry’s reported financials in a number of ways, including increased reserving, pressure on net investment yields and interest margins, increased hedging costs, and reduced fee income due to reduced asset balances.

Fitch will soon conduct a comprehensive review of all ratings assigned to US life insurers, including updated base and stress case ratings assumptions to reflect coronavirus pressures.

As part of this process, Fitch expects the ratings on a number of life insurers currently with stable outlooks will be revised to negative, while those already on negative outlook may be downgraded.

While the US life industry continues to benefit from strong balance sheet metrics, analysts said that the fundamentals of the sector had been weakened even before the virus outbreak.

This is due to factors such as a sharp unexpected decline in interest rates over the past year and expectation that interest rates will remain low for an extended period of time.

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