Fitch Ratings: Rating Outlook for U.S. Life Insurance Industry Revised to Negative

Fitch Ratings has revised the rating outlook for the U.S. life insurance industry to negative from stable. The outlook revision is due to increased concerns over the Coronavirus and related impacts on the credit quality of life insurers.

Source: Fitch Ratings | Published on March 17, 2020

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Today's rating outlook revision to negative reflects significantly increased uncertainties facing life insurers associated with the material disruption in the financial markets, which may last for an extended period of time. The industry is also exposed to a spike in mortality risk, the severity of which at this point is highly uncertain.

Over the near term, the deterioration in the equity market and decline in interest rates will pressure life insurers' earnings, reserves and capital. Longer term, Fitch expects the potential for a sustained disruption in the broader economy could cause deterioration in the credit markets, which would lead to increased bond and loan defaults and further pressure statutory capital levels.

Fitch expects financial market disruptions will affect the industry's reported financials in a number of ways, including increased reserving due to assumption revisions and for embedded guarantees associated with variable and indexed annuities, pressure on net investment yields and interest margins, increased hedging costs, and reduced fee income due to reduced asset balances.

Fitch expects to soon conduct a comprehensive review of all ratings assigned to U.S. life insurers. This will include development by Fitch of updated base and stress case ratings assumptions to reflect the above noted pressures from the coronavirus. Ratings currently on a positive rating outlook will be prioritized during this review process. In addition, Fitch expects the ratings on a number of life insurers currently with stable outlooks will be revised to negative. Those currently on negative outlook may be most exposed to a near-term downgrade.

Fitch notes that ratings in the U.S. life insurance industry continue to benefit from strong balance sheet metrics, including very strong statutory capitalization, good asset quality and very strong liquidity position. However, even before the pressures from the coronavirus, the fundamentals of the U.S. life insurance sector had weakened due to the sharp unexpected decline in interest rates over the past year and expectation that interest rates will remain low for an extended period of time.