Moody’s US Life Insurance Industry Outlook recognizes calmer interest rate and economic environment, easing pressures on life insurers
December 5, 2013- Moody’s has changed its outlook on the US life insurance industry to stable from negative, driven by our expectation that interest rates will continue their gradual rise in 2014, and that slow improvement in US economic growth rates and employment levels will continue.
These factors, which form our central economic scenario1, support our view that the downside risks to the life insurance industry, while not completely gone, have diminished, allowing for the stabilization of life insurers’ revenues and earnings over the next 12-18 months.
The following factors support our stable outlook:
- Rising interest rates should continue to relieve pressure on life insurers’ profits. Higher interest rates will ease spread compression in spread-dependent businesses, like fixed annuities and universal life, and move long-term investment returns closer to reserve and pricing assumptions for long-tailed products, like long-term care and long-term disability income. The need for statutory reserve increases and GAAP intangible write-downs will diminish.
- Economic stability supports greater insurance purchases. Receding economic headwinds will ease discretionary spending pressures on US households, translating into higher life and annuity premiums and deposits to pension plans, lifting pressure on insurers’ revenue and earnings growth.
- Rising equity markets will continue to improve the performance of variable annuity (VA) portfolios and other AUM-fee driven businesses. The profitability of legacy VA portfolios will continue to improve as equity markets and interest rates rise. Fees from rising pension plan and mutual fund assets under management will also continue to rise. However, equity market and VA earnings volatility will remain in the picture, and policyholder behavior vis-a-vis lapses and the utilization of their guaranteed benefits will remain a wildcard for hedging and reserving.
Definition of an Industry Outlook
The Industry Outlook (positive, stable or negative) indicates our forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of the life insurance industry over the next 12-18 months. As such, the outlook provides our view of how the operating environment for the life insurance industry, including macroeconomic, competitive and regulatory trends, will affect, among other things, asset quality, capital, funding, liquidity and profitability.
Since outlooks represent our forward-looking view on credit conditions that factor into our ratings, a negative (positive) outlook suggests that negative (positive) rating actions are more likely on average.
However, the Outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of the rating outlooks of issuers in the industry, but rather our assessment of the direction of credit fundamentals overall within the industry broadly.