Fitch Ratings-Chicago/New York-25 February 2022: U.S. life insurers saw their highest single period of growth over the past five years in 2021, according to Fitch Ratings’ new GAAP Results dashboard. Pre-tax operating income rose approximately 45% on an aggregate basis from 2020, and the average operating ROE in Fitch’s universe increased to 13.4% at year-end 2021 from 9.6% in 2020.
The increase reflects strong net investment income driven by alternatives as well as higher account values from strong equity market performance, partially offset by elevated mortality experience. The dashboard provides individual company metrics for return on equity (ROE) as well as Fitch’s expectations for operating results, M&A, and interest rates for 2022.
Pretax operating income rose approximately 45% on an aggregate basis in 2021, compared with
2020, reflecting the highest single period of growth over the past five years. The increase
reflects strong net investment income, driven by alternatives and higher account values from
strong equity market performance, modestly offset by higher mortality experience. The average
operating ROE in Fitch Ratings’ universe increased to 13.4% at YE 2021 from 9.6% in 2020.
Realized Gains: Based on 2021 results, net realized investment gains of Fitch’s 15 life insurers
grew to $12 billion, a significant increase from the $0.3 billion reported in 2020. The increase in
operating ROE was attributed to higher net investment spread, primarily due to stronger income
from alternative investments and appreciation in investment portfolios. Additionally, surging net
income numbers benefited from realized investment gains due in part to derivatives.
Mortality Uncertainty Remains: Elevated mortality partially offset the favorable investment
experience in 2021y, particularly within the group life segment, which generally has a lower
average age and a higher net amount at risk compared with individual policies.
Fitch currently expects mortality experience to remain elevated in 1Q22, but for the impact
of COVID-19 to decline over the course of the year, subject to any new variants. Favorably,
group life business is repriceable at regular intervals, and Fitch expects insurers to raise rates
based on recent experience. Fitch notes that the longer-term impacts of COVID-19 on
mortality and morbidity rates remains a focus area for the industry.
Less Favorable Results for 2022: Fitch expects less favorable net investment income in
2022, primarily due to more normalized alternative investment returns. Fitch expects the
Federal Reserve will raise rates twice in 2022, taking the rate to 75bps by YE 2022 from
25bps currently. While interest rates trended upwards, rates remain low by historic
standards and insurers continue to face spread compression.
Active M&A Market: Fitch expects the M&A market to remain robust in 2022, particularly
block transactions, following a large volume of deals in 2021. Impetus for deals include the
protracted low interest rate environment, shareholder pressure on public companies and the
upcoming GAAP accounting standard changes in 2023 — long-duration targeted
Fitch expects LDTI to lead to material declines in reported shareholders’ equity for certain life
insurers, along with increased volatility in net income. While the accounting change does not
impact the economics, it could incentivize reductions in market-risk exposure and long-dated liabilities.