Despite pressures, the U.S. life insurance industry is maintaining a stable outlook in 2005, according to an analysis by Standard & Poor’s Ratings Services, New York.[@@]

S&P credits prudent risk management by life insurance companies for keeping a number of challenges at bay.

Still, this could be a transitional year for the industry, according to the report, “U.S. Life Insurance Mid-Year 2005 Outlook: Managing Risk Prudently Preserves Stable Sector Ratings Outlook.”

The industry remains well capitalized ==perhaps better than before the most recent downturn == with healthy earnings and revenue potential, S&P says. But although corporate bond defaults remain low, that could begin to change next year, it warns.

Thanks to favorable demographic trends, the industry’s sales prospects remain strong. Due to intense price competition, individual life sales are likely to grow in the high single digits in 2005, moderating to the low- to mid-single digits later.

S&P expects annuity products to show double-digit sales growth, though much of this will be for replacements of existing policies.

Slim interest rate spreads continue to depress earnings moderately, as long-term rates fell back below 4%, defying projections. Older products, which carry higher interest rate guarantees, cause the greatest strain, S&P notes.

Short-term interest rates have increased significantly, while the long bond has come down more, and the industry might not have competitive products to offer when multiyear-guarantee annuities mature over the next few years.

The consequence could be a massive number of annuity surrenders, S&P says.

“This will be significant,” says S&P credit analyst Rodney Clark. “As long as the yield curve is as flat as it is==or even inverted==and the long bond isn’t really moving anywhere, the situation we’ll see is that there will be an enormous amount of money rolling over in the industry without any good alternative to offer to the people who are cashing out.”