Approximately two-thirds of publicly traded life insurers in the U.S. rated by Fitch improved profitability in the first-half of 2018, and while higher interest rates will mitigate spread compression, the rating agency warns that this will remain a headwind in the second half of the year.
For the U.S. life insurers in Fitch’s rated universe, pre-tax operating profit jumped by roughly 8%, on an aggregate basis, in the first six months of the year. The ratings agency states that improved earnings were driven by the impact of the tax reform, favourable investment results, as well as higher asset-based fee income as a result of a higher asset base.
The average aggregate operating return on equity (RoE) of the group increased to 14.7% in H1 2018, with approximately 66% of life insurers reporting improved profitability.
Offsetting some of the improvement, Fitch notes that investment income declined by 4% in the first-half of 2018, driven by low reinvestment rates and lower income from alternative investments.
During the second-quarter, the 10-year Treasury rate increased to 2.85%, and Fitch believes that this will somewhat mitigate the adverse effects of spread compression. Although, modest spread compression is expected to continue to be an earnings headwind going into H2 2018, says Fitch.
As well as improved interest rates, Fitch also notes that hedging activity and the impact of new business will also serve to alleviate some of the pressures of low rates.
