U.S. Life/Health Rating Activity Mixed For 2021 As Insurers Navigate Headwinds

Mergers & Acquisitions heat up after being Covid-suppressed

OLDWICK, N.J., February 17, 2022—The increased number of Credit Ratings in the U.S. life/health insurance industry placed under review in 2021 mainly reflects the return of merger and acquisition (M&A) activity that was depressed in the previous year amid the pandemic surge, along with earnings declines in the life/annuity segment from heightened mortality, according to a new AM Best report.

The Best’s Special Report, titled, “Life/Health Rating Activity Mixed for 2021 as Insurers Navigate Headwinds,” states that the number of life/health insurers that saw their ratings placed under review by AM Best rose to 38 compared with nine in the previous year. Of the 38 rating actions, 18 were on health insurers, with the remainder on life/annuity insurers. Rating downgrades were slightly elevated in 2021 compared with 2020, while upgrades and assigned ratings were in line with previous years.

Overall rating activity increased slightly in 2021, with 355 rating actions taking place in aggregate for the life/health carriers, compared to 326 during 2020. Rating affirmations continued to account for the bulk of rating actions, at 76%.

Other highlights from the report include:

• In 2021, there were 17 rating upgrades and 4 downgrades in the health segment. By comparison, there were 13 upgrades and two downgrades throughout 2020. Rating activity has reflected overall favorable earnings over the past few years, bolstered by the pandemic, as insurers reported higher-than-expected earnings in 2020, favorably contributing to higher absolute and risk-adjusted capitalization levels; and
• During 2021, there were 12 rating upgrades and 12 rating downgrades in the life/annuity (L/A) segment, compared to 15 upgrades and eight downgrades in 2020. L/A carriers continued to face COVID-related challenges in 2021, with heightened mortality, extreme fluctuations in equity markets, a low interest rate environment and tightening spreads. L/A insurers’ risk management frameworks have helped them navigate the pandemic.

The impact of inflation on the economy and the way the COVID-19 pandemic progresses will continue to challenge the health and L/A segments. Over the past few years, health insurance carriers have strengthened their resilience and bolstered their ability to adjust to a rapidly changing market and regulatory environment, which when coupled with better financial wherewithal, puts the segment in a good position to navigate complexities and challenges in 2022. The L/A segment will continue to face hurdles in 2022, but AM Best believes the industry will be able to address these challenges because of improved capitalization, profitability and enterprise risk management practices resulting from the COVID-19 pandemic. Still, some adverse factors could negatively impact the segments. AM Best will continue to monitor changing conditions and take any necessary actions.

Excerpts from the Report:

Life/Annuity Segment

During 2021, there were 12 rating upgrades and 12 rating downgrades in the L/A segment, compared to 15 upgrades and 8 downgrades in 2020. L/A carriers continued to face COVID-related challenges in 2021, with heightened mortality, extreme fluctuations in equity markets, a low interest rate environment, and tightening spreads. L/A insurers’ risk management frameworks have helped them navigate the pandemic. Death claims have impacted earnings, but many leading companies reported strong earnings and product sales in 2021. Over half of the upgrades for the L/A carriers were driven by increased capitalization and balance sheet improvements. Downgrades resulted mostly from weakening balance sheets, removal of rating enhancement from the parent entity, and declines in operating performance. While 20 L/A carriers were placed under review during 2021, only three were under review with Positive Implications.

Rating Changes: Building Block Assessment Drivers

Throughout 2021, the aggregate L/A and health segments combined for 29 upgrades and 16 downgrades. Nearly 45% of the upgrades resulted from increased capitalization, which impacted balance sheet strength assessments. Other drivers reflected acquired entities being more integrated into higher rated rating units, increased product diversification and enhanced distribution channels that affected the business profile building block, and increased rating lift from the lead rating unit. Conversely, the removal of rating enhancement from the parent entity was one of the top drivers for the downgrades, followed by weakening balance sheets and deteriorating operating performance.

Rating Outlooks

The proportion of total US life/annuity and health carriers with Stable ICR outlooks decreased marginally, to 82.6% as of December 31, 2021, from 84.7% at year-end 2020. Ratings Under Review are elevated at 18 primarily due to resumed M&A activity in 2021, which was somewhat depressed in 2020 as a result of the pandemic. Positive outlooks declined to only 15, the lowest total over the last five years, while Negative outlooks stayed in line with prior years. Life reinsurance, which is the smallest segment, is only comprised of six rating units; one RU had a Negative outlook while the rest were Stable.

Life/Annuity

The L/A segment, which accounts for the majority of the rating units, reported the same number of RUs with Negative outlooks and slightly fewer Positive outlooks as of December 31, 2021, compared to year-end 2020. In December 2021, AM Best revised its outlook for the US L/A segment to Stable from Negative, owing to record levels of capitalization, strong liquidity, manageable losses from COVID, and robust sales of new business. Notwithstanding these factors, L/A carriers still face ongoing concerns surrounding the low interest rate environment, tightening credit spreads, inflationary headwinds, legacy liabilities in risky product offerings, and the lingering COVID-19 pandemic. Insurers have benefited from lower costs of capital and strong liquidity, which has positioned them well as the economy improves and interest rates rise. Under Review actions for the segment increased to 4.4% of rating units, up from 1.4%.