The 2022 outlook for the U.S. life insurance sector is stable, reflecting the ongoing, although slower pace of recovery for the economy, Moody’s Investors Service said in a new report. However, while persistent inflation, supply chain issues, and new COVID-19 variants are risks, the still-solid level of growth supports a continuing stable outlook.
“COVID-19’s highly contagious delta variant, together with supply chain disruptions in goods and services, slowed the pace of the U.S. economic recovery in 2021, but these supply chain imbalances will likely be corrected in the next two to three quarters, helping to solidify an already durable economic recovery,” Moody’s vice president Laura Bazer said. She cautioned, however, that a new variant such as omicron could delay the recovery.
In its report, Moody’s cited the following factors.
Modest inflation is credit positive for life insurers. Inflation – at 6.2% for the last 12 months - has risen faster and stayed longer than expected this year, with 10-year Treasury rates reaching over 1.7% this spring and Federal Reserve interest rate hikes likely in early 2023. However, some inflation is good for insurers, improving their investment yields and spreads on annuities, among other interest-sensitive products, and also boosting their sales. A sharp persistent spike in rates would be credit negative, but this is not what Moody’s expects.
The private equity-assisted mergers and acquisitions boom accelerates life insurers' transformation – and investment illiquidity. Mergers and acquisitions continue unabated, with the help of private equity capital. The disposal of legacy life insurance business will continue to advance insurers' transformation from protection providers to fee-based asset gatherers, administrators, and employee benefit providers. M&A is generally good for sellers, but less so for policyholders, who typically face greater credit risk than they started with. Many insurers, including a number of PE sponsored insurers, seek to increase asset yields of their acquired business via less liquid and higher-yielding, but also higher-risk assets.
Regulators establish new rules to address an evolving world. Life insurers face a host of new rules in 2022, including government, state, regulatory, and accounting rules, with mixed credit implications. These include new National Association of Insurance Commissioners fairness guidelines to protect policyholders in the use of artificial intelligence; the expansion of NAIC capital bond rating designations; possible corporate and personal tax increases; plus pending GAAP long-duration targeted accounting improvements. Moody’s said none of these changes, per se, are likely to upset the industry's stable outlook, however.
What could return the outlook to negative from stable? A sharp, material and prolonged spike in inflationary interest rates (for example, over 300 basis points), precipitating elevated policy surrenders that tighten insurers' liquidity, would prompt Moody’s to change the outlook to negative from stable. A renewed economic shutdown brought on by a new COVID-19 variant, with a return to ultralow (0-.50 bps) interest rates and a drop in the equity market (-40%) would also prompt a negative outlook.