Strengthening Economy Leads To Stable Outlook For Life Insurance

Moody's Investors Service moved its outlook for the U.S. life insurance sector to stable, one year after the COVID-19 pandemic prompted the analysts to give a negative outlook to the sector. Moody's expectation for a strong U.S. economic rebound in 20211, driven by the improving health of individuals as mass vaccinations tamp down the virus, and by an economic recovery, support a more favorable operating environment for life insurers and a stable industry outlook over the next 18 months – despite continuing low interest rates.

Economic rebound supports top and bottom line industry growth. Moody's baseline
forecast for U.S. GDP growth is 4.7% in 2021, following a decline of 3.5% in 2020, with
an improving employment picture in 2020. This, accompanied by the expected lifting of
restrictions on most economic activity and interpersonal interactions support improving
prospects for life insurance product sales and profit in 2021. Coronavirus-driven mortality
and investment losses in 2020 should continue to normalize this year.

Industry transformation expedited by low interest rates and M&A. The prospect
of very low interest rates weighing on investment and spread-derived income for a long
time to come is forcing life insurers to examine their business models via mergers and acquisitions, Moody's reports. The sale or reinsurance of business to buyers, which increasingly include private equity  firms, provide solutions to life insurers looking for a way out of volatile, interest-sensitive or underperforming annuity and life businesses.

Technology will remain on an accelerated path. The pandemic-driven year of
contactless, virtual business interaction, by necessity, accelerated the digitization of life
insurance sales processes that were already underway pre-pandemic, according to Moody's. Digital advances – from the application process, to e-signatures and e-policy delivery will continue to shorten the buying process – a credit positive for future insurance sales.

What could change the outlook back to negative? Moody's said a resurgence of the pandemic
and mortality, precipitating new economic lockdowns, contractions in GDP, the lowering
of interest rates, and rising unemployment would prompt a return to a negative life
insurance industry outlook. A sharp drop in the equity market (for example, a 40% drop in
the S&P 500), would be another factor, given life insurers’ sizable exposure to fee-based,
equity-sensitive asset management-related businesses.

Economic Rebound Supports Life Insurance Top And Bottom Line Growth

Although the pandemic is still much with us, significant progress in mass vaccinations across the U.S. population are helping to bring the virus under control. This, and monetary and fiscal stimulus, underpin Moody's baseline forecast for U.S. GDP growth of 4.7% for 2021, following a contraction of 3.5% in 2020.

Moody's expects momentum to build through the summer, with the lifting of additional restrictions on certain coronavirus-affected businesses (such as restaurants, travel and leisure, etc.), and social distancing, and on the reopening of schools and offices in parts of
the country where the virus has been brought under control. Moody's also forecasts unemployment to decline to 5.8% this year from 8.1% in 2020 starting in the second quarter of 2021, as the U.S. health picture continues to improve.

Life insurers' top and bottom lines will benefit. A growing economy boosted by substantial government stimulus and declining unemployment is good for life insurers, Moody's said, since this will put more disposable income in the hands of individuals, for whom life insurance policies and annuities are discretionary purchases.

Greater mobility should also boost sales, which were down due to shutdowns in the first half of 2020 that eliminated person-to-person interactions. However, Moody's also expects direct-to-consumer sales, which have run higher during the pandemic, to continue in 2021 and beyond, given improvements in life insurers' technology that have contributed to more seamless, end-to end sales virtual processes.

Despite the pandemic, life insurers are in good financial shape. Although COVID-19 mortality continues to depress industry profit, losses have been less severe than life insurers and Moody's originally expected. This is largely due to differences in the health, employment, education and income levels between the general and the insured population, as well offsets from COVID-19 deaths in other products (for example, long-term care, payout annuities). With mass vaccinations moving the US closer to a degree of herd immunity, Moody's said it believes the worst of COVID-19's impact is behind us.