Restructuring the U.S. Life Insurance Sector Involves Risk: Moody's Analysts

What You Need to Know

Private equity firms are providing plenty of funding to life insurers for transformation.
However, private equity firms may have a greater appetite for investment asset risk than other deal funders.
The strategic transformations adds to disruption and uncertainty.

Turmoil related to the COVID-19 pandemic has eased, and U.S. life insurers appear to be doing well.

But some of the steps life insurers are taking to deal with low interest rates could eventually cause problems.

Laura Bazer and other analysts at Moody’s Investors Service give that assessment in a new U.S. life sector outlook report.

A sector outlook indicates how Moody’s expects overall credit conditions to affect the creditworthiness of the companies in the sector over the next 12 to 18 months.

A year ago, Moody’s analysts changed the U.S. life sector’s outlook to negative, from stable, because of worries about the COVID-19 pandemic. The analysts changed the outlook back to stable earlier this week.

“Although the pandemic is still with us, significant progress in mass vaccinations across the U.S. population are helping to bring the virus under control,” the analysts say.

Private Equity Impact

For life insurers, pandemic-related claims and investment losses have been lower than feared. But the analysts suggest that some of the private equity firms behind many life and annuity deals tend to choose riskier investments than traditional life insurers choose.

Life insurers’ efforts to reduce risk, by shifting toward fee-based products and services, such as asset management, and away from providing guaranteed, interest-sensitive insurance products, could also add risk, the analysts say.

“The paths of individual insurers’ strategic transformation, which may involve strategic review of their entire operations, are disruptive, adding uncertainty to their future business and credit profiles,” the analysts write.