Fitch Ratings-Chicago/New York-19 May 2021: Fitch Ratings has revised its rating outlook for the U.S. life insurance industry to stable from negative. Fitch anticipates that key credit metrics will remain consistent with rating expectations over the next one to two years based on revised assumptions regarding the economic impact of the coronavirus pandemic and its effect on the credit quality of U.S. life insurers.
When uncertainty about the implications of the coronavirus pandemic peaked in 2020, almost 30% of ratings assigned to U.S. life insurers had a Negative Outlook or were on Negative Watch. As of today, that number has fallen to less than 5%.
"Fitch’s stable rating outlook for U.S. life insurers reflects the improved macroeconomic environment and reduced concerns regarding asset quality deterioration within general account investment portfolios,” said Douglas Meyer, Managing Director. “Longer-term concerns include continued low interest rates pressuring reserve adequacy and earnings on legacy in-force business and sales of interest-sensitive products. Exposure to commercial real estate (CRE) investments could also be an issue.”
Fitch expects a continuation of the current strong economic backdrop for the balance of 2021 and into 2022 and has lowered its forecast for high yield bond and institutional loan default rates. The macroeconomic environment has benefited from favorable capital market access, government stimulus and progress on coronavirus vaccinations. Accordingly, Fitch has lowered expectations for investment losses and credit migration.
Fitch remains concerned about the industry’s exposure to CRE-related investments, which have been negatively impacted by coronavirus-related shutdowns. CRE-related investments reported relatively modest losses in 2020, but Fitch expects an increase in 2021 and 2022. While these potential losses would likely be manageable in relation to earnings and capital under our base case assumptions, considerable uncertainty remains regarding this asset class.
Fitch expects prolonged low interest rates will bleed into reported earnings over time. However, low interest rates are expected to continue to pressure reserve and capital adequacy and increase concerns that life insurers will overreach for yield.
Fitch expects M&A activity to remain robust, driven by a combination of factors, including low interest rates, strategic shifts away from capital market-sensitive businesses, and pressure from shareholders. Recent increases in M&A activity have come in the form of block reinsurance transactions, legal entity sales, and company acquisitions. This reflects the increasing role of alternative investment managers in the U.S. life insurance industry. M&A activity has historically been a key driver of rating changes.