Ratings outlook for US life insurance industry revised to negative

Written by Adam Cadle

17/03/2020

The US life insurance industry has had its ratings outlook revised to negative from stable.

Fitch Ratings said the decision is due to increased concerns over the coronavirus and related impacts on the credit quality of life insurers. The industry is also exposed to a spike in mortality risk, the severity of which at this point is highly uncertain.

“Over the near term, the deterioration in the equity market and decline in interest rates will pressure life insurers’ earnings, reserves and capital,” Fitch stated.

Fitch expects the potential for a sustained disruption in the broader economy could cause deterioration in the credit markets, which would lead to increased bond and loan defaults and further pressure statutory capital levels.

In addition, Fitch expects financial market disruptions will affect the industry's reported financials in a number of ways, including increased reserving due to assumption revisions and for embedded guarantees associated with variable and indexed annuities, pressure on net investment yields and interest margins, increased hedging costs, and reduced fee income due to reduced asset balances.

It is expected that a comprehensive review of all ratings assigned to US life insurers will be carried out. This will include development by Fitch of updated base and stress case ratings assumptions to reflect the above noted pressures from the coronavirus. Ratings currently on a positive rating outlook will be prioritised during this review process.

"Ratings in the US life insurance industry continue to benefit from strong balance sheet metrics, including very strong statutory capitalisation, good asset quality and very strong liquidity position," Fitch underlined.

"However, even before the pressures from the coronavirus, the fundamentals of the US life insurance sector had weakened due to the 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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