Fitch Ratings issued a neutral outlook for North American life insurers in 2026, citing strong capital positions, disciplined asset and liability management, and solid liquidity profiles. According to the rating agency, these factors position insurers to manage a more challenging operating environment that includes declining policy rates, slower economic growth, elevated macroeconomic volatility, and ongoing geopolitical uncertainty.
Despite these pressures, Fitch expects the sector’s balance sheet strength to continue supporting credit ratings through 2026.
Earnings Stability Amid Rate and Market Pressures
Fitch expects operating earnings, net investment income, and return on equity to remain stable across the sector. Several factors support this outlook, including growth in assets under management, improving fixed-income returns, and wider investment spreads. These positives are expected to partially offset the effects of declining policy rates and equity market volatility.
U.S. life insurers remain exposed to interest rate movements. However, Fitch notes that closely matched assets and liabilities help mitigate the impact of rate fluctuations. This structural alignment continues to play a key role in limiting earnings volatility during periods of rate adjustment.
Credit Losses and Capital Resilience
Fitch anticipates a modest year-over-year increase in credit losses in 2026. The agency plans to monitor investment quality and underwriting activity for indicators of late-cycle behavior or elevated risk-taking. While Fitch does not include a severe market downturn in its base case, it notes that strong capitalization would partially insulate insurer balance sheets if broader market conditions deteriorate.
This capital strength remains a central factor in Fitch’s assessment of sector stability, particularly as insurers navigate credit normalization and evolving investment strategies.
Commercial Real Estate Exposure Trends
Commercial real estate exposure, particularly in office properties, continues to face pressure. Fitch reports that conditions are gradually improving due to increased transaction activity and lower interest rates. Life insurers have meaningfully increased credit loss reserves tied to commercial real estate, reflecting the challenging environment.
According to Fitch, these reserves should be sufficient to absorb the expected increase in realized losses. While risks remain, the agency views current reserve levels as a stabilizing factor for balance sheets.
Growing Investment Risk and Alternative Strategies
Fitch expects investment risk for U.S. life insurers to increase modestly in 2026. Growth in offshore reinsurance and partnerships with alternative investment managers is expected to continue. In pursuit of higher yields and longer-term returns, insurers have expanded allocations to private credit and Level III assets.
Despite this shift, Fitch does not expect widespread rating pressure if private credit performance weakens over the next 12 to 24 months. Partnerships with alternative investment managers are increasingly structured as strategic alliances, minority ownership stakes, reinsurance platforms, and sidecars. Fitch notes that most large alternative investment managers now maintain established insurance platforms.
Regulatory Scrutiny of Less-Liquid Investments
The continued shift toward less-liquid investments is drawing increased regulatory attention. Fitch highlights growing scrutiny aimed at ensuring that capital levels remain appropriate for the risks assumed. Regulators are paying closer attention to private credit exposure due to potential spillover risks linked to increasing interconnectedness among financial market participants.
In response, regulatory bodies have introduced measures to enhance transparency and resilience. In the United States, the National Association of Insurance Commissioners has proposed initiatives to strengthen disclosure requirements and capital standards. Similarly, the Bermuda Monetary Authority has adopted measures designed to protect policyholder obligations through improved oversight.
Risks Associated With Private Letter Ratings
Fitch identifies the rapid growth of private letter ratings as an emerging risk for U.S. life insurers. As exposure to complex and less transparent investments increases, the industry faces assets that have not been tested through a full macroeconomic downturn.
Key areas under observation include the effectiveness of upcoming regulatory measures, the proportion of capital invested in private letter-rated issuers, asset illiquidity, and valuation practices. Fitch emphasizes governance, subjectivity, reliability, and transparency as important considerations when assessing these exposures.
Funding Asset-Backed Notes Issuance
Positive market conditions have supported record issuance of funding asset-backed notes, driven by growing issuer participation and strong investor demand. Fitch expects robust issuance to continue into 2026, with volumes influenced by the pace of interest rate cuts and the behavior of credit spreads.
Fitch notes that funding asset-backed notes introduces incremental risk compared to traditional insurance liabilities. Their credit sensitivity, interest rate exposure, and commoditized structure contribute to this risk profile. Elevated issuance levels could marginally increase credit risk, even in a generally stable but volatile market environment.
Continued Growth in Offshore Reinsurance
Offshore reinsurance activity is expected to expand further in 2026 as insurers seek to increase reported capital and earnings through spread-based transactions. Fitch cautions that this trend can elevate counterparty credit risk.
To address these exposures, Fitch evaluates reported capital on a consolidated basis using its Prism capital model. This approach limits the impact of regulatory arbitrage on assessed capital strength and overall credit profiles.
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