Moody’s Investor Service announced that it has changed its outlook on the U.S. life insurance sector to negative.
The outlook is not a credit rating action, but is instead a forward-looking assessment of fundamental credit conditions and operating conditions that will affect the creditworthiness of the U.S. life insurance industry over the next 12-18 months.
Unprecedented economic turmoil
In changing its outlook from stable to negative, Moody’s says current and unprecedented economic turmoil owing to the COVID-19 pandemic, the decline in U.S. Treasury rates and a higher likelihood of a prolonged low rate environment are all pressuring U.S. life insurers. They also say the economic damage and oil price shock will strain insurers’ capital through bond ratings downgrades and defaults.
“Although the industry is well capitalized and the Federal Reserve has taken actions to backstop asset liquidity, we view the economic and interest rate trends as negative for the sector overall,” say authors of the Moody’s report entitled Outlook changed to negative amid low interest rates, credit deterioration. “The negative outlook reflects our view that certain life insurance ratings could be downgraded.”
Interest-sensitive products
The ratings service says insurers have taken steps to manage the current low interest rate environment, but add that earnings of interest-sensitive products will continue to see further declines. An increase in defaults or a sharp drop in returns from alternative investments could also cause some insurers to reduce their return assumptions. Depressed equity markets, meanwhile, will also reduce earnings for equity-sensitive products. “Risk management in the life sector has significantly improved in the last decade which will help mitigate the negative effects of volatility on variable annuity embedded guarantees, for example. However, these guarantees could prove costly to insurers in a prolonged low interest rate environment.”
Mortality exposure risk
Although it says they consider the sector’s mortality exposure risk is lesser than the secondary market impacts, Moody’s also says losses from death benefit claims could also grow significantly for U.S. life insurers if coronavirus deaths continue to spike in that country.
“Over time, we expect much of the impact of low rates will affect insurers’ earnings,” says Moody’s vice president, Manoj Jethani. “There is also the risk of more sizable changes on a GAAP and statutory accounting basis, as insurers review the viability of their long-term interest rate assumptions.”
