Good management, a relatively stable economy, and recovery in the financial markets could make 2011 a good year for U.S. life insurers, Fitch Ratings analysts say.
Douglas Meyer, one of the analysts at Fitch, Chicago, who participated in a 2011 life outlook teleconference today, emphasized that many reasons for caution remain.
"Our primary rating concerns for the U.S. life insurance sector include continued uncertainity about the economic outlook and the potential for an unexpected shock to the economy, higher than 
expected losses on commercial real estate related assets, emerging interest rate risks due to the historically low rates, which are affecting industry investment yields and profitablilty, and uncertainty regarding the future direction of those rates," Meyer said. "And, lastly, the uncertainty associated with the regulatory environment affecting the U.S. life insurance business."
But "the industry has performed relatively well over this economic downturn," Meyer said. "Ratings in the sector greatly benefited from the industries' relatively stable liability profile and strong capital position coming into the downturn."
Fitch expects to see life insurers' balance sheets and income statements to
continue to show material improvement this year, Meyer said.
"We expect 2011 to be relatively low default year," Meyer said. "Essentially a repeat of 2010."
In a report Fitch released before the teleconference, Fitch analysts say the capital markets are now far more liquid than they were in 2008 and 2009. Insurers have been able to raise new capital and refinance short-term obligations, and both realized and unrealized investment losses are substantially lower than they were a year ago.
The obstacles Fitch sees confronting life insurers today include lower interest rate earnings on investment portfolios, higher hedging costs, the possibility that losses on commercial real estate-related assets could be higher than expected, and operations realignment costs.
"Fitch expects the industry's large in-force book of variable annuity business will continue to be a drag on profitability over the near term, and could cause a material hit to industry earnings and capital in an unexpected, but still plausible, severe stress scenario," the analysts warn.
In the long run, the analysts say, life insurers could suffer if interest rates spike and wreck the investment strategies insurers have been using to cope with low rates.
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