Analysts at Fitch Ratings have warned that sustained low interest rates, the increased role of alternative investment managers and accounting changes will have long-term credit implications for the life insurance industry.
The rating agency says pressure on financial performance of legacy in-force business from low interest rates is not expected to abate in the near term.
Analysts also have a negative view on the way life insurers overreach for yield in various ways due to low interest rates and increase their vulnerability.
Exposure to commercial real estate-related assets also remains a downside risk amid relatively benign credit trends that are expected to continue into 2022, although Fitch believes potential losses will be manageable in relation to earnings and capital.
Overall however, the neutral sector outlook for US life insurers reflects improvement in the macroeconomic environment over the past year and strong industry balance sheet fundamentals, which are expected to persist in 2022.
Lower interest rates, which are expected to increase modestly in 2022, have resulted in significant changes in product strategies and the competitive landscape, including increased M&A activity and tie-ups with alternative investment managers.
Credit implications of PE tie-ups have been mixed, with potential for higher risk due to changes in life insurers’ investment strategies that may result in increased exposure to higher risk asset classes.
Fitch further notes that new, more punitive GAAP accounting rules, Long-Duration Targeted Improvements (LDTI), are expected to result in volatility to reported earnings, with large increases in GAAP liabilities.
Effective in 2023, LDTI will affect the management strategies on in-force businesses in 2022, with actuarial assumptions to be updated at least annually and discount rate assumptions to be updated quarterly.