The U.S. life insurance industry has taken solid strides toward improving risk management.[@@]
An analyst at Standard & Poor’s, New York, gives that assessment in a new report on the U.S. life sector.
The sector has seen a healthy earnings recovery “with solid revenue potential and very strong capitalization,” says S&P analyst Rodney Clark.
“We see the potential for greater earnings stability for this sector over the near term as refinance risk is becoming less of an issue due to the fact that products are increasingly being sold in multi-years of 4-, 5- and 7-year increments instead of 1,” Clark says.
Corporate bond defaults remain low, but that could begin to change in 2006, Clark says.
Clark emphasizes the importance of life insurers’ recent efforts to improve risk management, but he notes that those efforts create new challenges.
“Some U.S. life insurers have shied away from credit risk given the losses sustained in the past several years and have sought to enhance yield by extending asset durations,” Clark says. “Those companies are at the greatest risk in a rising rate environment, which will tend to lengthen asset duration and increase the level of mismatch versus liabilities.”
The last half of 2005 is expected to be a transitional time for U.S. life insurers.
“We expect to move gradually out of the low interest rate environment, although meaningful improvement in earnings due to spread income will probably not come until 2006,” Clark says.
But increased regulatory scrutiny will likely to result in more litigation to settle, and the rising potential for corporate bond defaults later this year will make the current positive momentum difficult to sustain, Clark says.