Life Insurers Can Withstand Even Extreme COVID-19 Second Wave, Moody’s Says

With interest rates at historically low levels and economic uncertainty remaining high, Moody’s Investors Service found its portfolio of U.S. life insurers well-positioned to withstand a severe scenario of elevated mortality from COVID-19 coinciding with stressed equity and credit markets.

Highlights from Moody’s analysis include:

Life insurers can tolerate higher COVID-19 claims; life reinsurers more exposed. COVID-19 has caused tragic loss of life across the U.S. and will result in elevated life insurance death claims. Life reinsurers are most exposed to increased death benefits. However, for Moody’s rated direct writers, the hit to capital from COVID-19-related death benefits should be small.

Most companies maintain over 250% risk-based capital ratios following adverse pandemic scenario. Despite the significantly adverse nature of Moody’s test, their rated life insurers perform well with an aggregate post-stress RBC above 350%, and nearly all above 250%. The largest immediate risk to capitalization levels is from investment losses – including the effects of rating migration on capital ratios. The next most material risks for the industry as a whole are from low interest rates and elevated mortality levels.

Investment risk remains a key credit risk for U.S. life insurers. The magnitude of impact on RBC ratios varies between companies; however, in general, insurance companies that hold high concentrations of securities rated at the lower end of A and Baa are most impacted by Moody’s credit migration scenario. Given heightened market volatility and downside risks, Moody’s assumes especially severe scenarios for equity and real estate investments.

Interest rate risk will likely weaken capital over longer periods, absent management action. The persistence of ultralow interest rates is likely the largest long-term risk facing the sector. For the most part, low interest rates will not hit RBC ratios immediately but there is a risk of sizable charges as insurers perform their year-end cash flow testing analysis.

Exposure to VA and LTC risk pressures some companies. Some life insurers have material exposure to variable annuity or long-term care legacy blocks. The effect of mispriced legacy blocks will typically not immediately affect capital but there is a risk of periodic sizable charges from assumption changes. For VA, there is a potential capital hit if the embedded guarantees are not well hedged.