The credit outlook for U.S. life insurers remains stable, according to a new report.
Standard & Poor’s discloses this assessment in a January 2014 report “Industry Economic and Ratings Outlook.” The report’s conclusions assume an improving economy, which could yield a “much-needed boost” to interest rates.
“So far, U.S. life insurers have maintained acceptable net interest margins amid the current low interest rates primarily through premium increases and by cutting the interest they credit to policyholder accounts,” the report states. Should low interest rates persist, such measures will become less effective because many blocks of business are already at or near their guaranteed minimum interest rates.
“Many life insurers have also looked to preserve investment yield by increasing allocations to less liquid (and in some cases high-risk) asset classes, including commercial mortgage loans, private placement bonds, asset-backed securities, and alternative investments,” the report adds. “Although such investments add risk to insurers’ credit profiles, the moves have been relatively modest to date and have not affected ratings.”
Underpinning the 2014 assessment is S&P’s forecast for gross domestic product, which the ratings agency expects will remain “sluggish” next year. S&P pegs the GDP growth rate at 2.6 percent. The report adds that interest rate rises would “do much in 2014 and 2015” to improve U.S. life insurers’ operating conditions, but cautions that actions of the Federal Reserve and other central banks “remains uncertain.”
The report attributes life insurers’ continuing financial strength to “strong capital, liquidity and stable investment portfolios” that have been buffeted by only minor credit losses.
“The average financial strength rating in the North American life insurance sector is A+,” the report states. “Equity market advances exceeded expectations in 2013 and we expect them to improve further in 2014, along with other economic indicators.
“This will continue to boost separate account balances … and asset-based fees for some insurers,” the report adds. “Sustained low interest rates or equity market declines at this point in the credit cycle, however, could slightly weaken ratings.”