U.S. life insurers are financially strong enough to navigate macroeconomic challenges in the year ahead, according to a new report.
FitchRatings arrives at this conclusion in its “U.S. Insurance Guide 2014.” The special report provides ratings and fundamental forecasts for six insurance-related sectors, including life, property and casualty, global reinsurance, health and managed cared, plus title and brokers.
“Fitch Ratings’ outlook for U.S. life insurance reflects the industry’s very strong balance sheet fundamentals, solid liquidity profile and improved operating performance,” the report states. “Fitch believes that the industry is well positioned to withstand macroeconomic challenges over the coming year.”
Among the report’s conclusions:
- Citing life insurers’ capitalization levels, retained earnings and capital management initiatives, Fitch gives positive assessments of the industry’s operating liquidity (strong), investment valuations (improved), as well as capital market liquidity and insurance holding company liquidity (very strong);
- Fitch expects that low interest rates and tight credit spreads will depress industry operating revenue and balance sheet fundamentals and prompt life insurers to scale back interest-sensitive insurance product lines in 2014;
- Insurers’ “better than expected” earnings in 2013 benefited from favorable equity market performance and “relatively benign” credit markets. The credit ratings agency expects “modest earnings improvement” in 2014.
The report warns, however, that uncertain monetary and fiscal policies pose risks to the economy and may prompt Fitch’s credit outlook for the industry to “turn negative.”
Conversely, Fitch adds that a 50- to 100-basis point rise in interest rates would be a positive for U.S. life insurers.
“Gradually rising interest rates is a positive scenario across all major insurance product lines, favorably affecting reinvestment rates and interest margins and strengthening statutory reserve adequacy, the report states. “Conversely, if interest rates decline to 2012 levels and stay low much beyond 2014, the agency’s outlook would likely be revised to negative based on weakened earnings profile and anticipated capital impacts associated with statutory reserve strengthening.”
Fitch’s outlook assumes also a less than robust economic recovery with “modest GDP” growth and continuing high unemployment in the near term.