Moody's Investor Service maintains a stable outlook for the US life insurance sector, driven by benefits of rising interest rates, which will offset slower economic growth as well as weakness in certain asset classes such as commercial real estate. Insurers’ solid capital positions will help them weather negative surprises in the capital markets and economy, and the rise in interest rates over the past year will help support profitability through higher investment income. The key drivers of Moody's 2024 outlook are:
Higher interest rates support portfolio yields and robust sales pipeline in interest-sensitive products. Moody's expects U.S. 10-year US Treasury yields to ease to their long-term equilibrium level of around 4% in 2024, as declining growth and inflation increase the likelihood of rate cuts by the Federal Reserve. US economic expansion remains robust, but a moderation in growth next year will avert potential overheating. Slower economic growth generally hurts sales of life insurers, but higher interest rates have increased demand for interest-sensitive insurance products like fixed-rate deferred annuities.
Conservative asset portfolio but investment risk on the rise. U.S. life insurers’ portfolios
remain well positioned for near-term economic or market adversity. The credit quality
of fixed income portfolios is solid and well diversified. However, in response to the lower
rate environment and aided by the influx of private capital to the industry, insurers have
been increasing their allocations to private structured investments and CLOs. They will also
face credit deterioration over the next several years in their sizable commercial real estate
Solid balance sheet fundamentals promote steady progress. U.S. life insurers have
strong capital levels and continue to prudently manage their capital programs with share repurchases and shareholder dividends. We expect continued strong operating company capital levels at year-end 2023 and into 2024. However, asset risk from weakness in commercial real estate, potential rating downgrades and higher defaults could impact portfolio performance and reduce capital strength. Furthermore, life insurers are increasingly using offshore reinsurance, which may allow them to manage their business more economically, but in some cases reduces capital and increases investment risk.
Regulations will evolve as regulators review investment, capital and fiduciary standards. Among the key regulatory developments, the National Association of Insurance Commissioners is seeking to update and revise the regulation of life insurer investments to better match life insurers’ shift in portfolio asset mix toward more private and structured investments.