U.S. Life Insurance 2021 Outlook Remains Negative, Fitch Says

Fitch Ratings-Chicago-03 December 2020: The ongoing concern regarding the economic fallout from the coronavirus pandemic could cause deterioration in key credit metrics relative to rating expectations over the next one to two years resulting in a negative outlook for the life insurance sector, according to a recent Fitch Ratings report.

"Fitch's negative rating outlook for U.S. life insurers reflects our assumptions regarding the economic fallout from the coronavirus pandemic" said Doug Meyer, Managing Director. "The negative outlook is sensitive to potential revisions in those assumptions subject to further clarity on the pandemic-related economic impacts and risk of a resurgence of the virus, and could remain in place well into 2021."

Deterioration in asset quality due to credit migration and increased defaults, and concern over the sharp unexpected decline in interest rates in 2020 is expected to persist. While Fitch expects prolonged low interest rates will bleed into reported earnings over time, low interest rates have a more immediate impact on Fitch's view of reserve and capital adequacy and increases concern that life insurers will overreach for yield.

Variable annuities (VA) represents a large business for U.S. life insurers in which approximately 60% of VA accounts include guaranteed living benefits which are sensitive to capital market performance. Divergence between emerging experience and policyholder behavior assumptions in light of the material decline in interest rates could result in a material increase in required reserving for this product line and a corresponding hit to statutory capital.

Finally, key regulatory developments that bear watching include the extension of regulatory forbearance on mortgage loan payments and related risk-based capital treatment, and approvals for in-force LTC premium rate increase requests as we head into 2021.