CHICAGO--(BUSINESS WIRE)--Fitch Ratings' fundamental sector outlook for U.S. Life Insurers is negative based on heightened macroeconomic challenges and uncertainty, which are expected to have a negative impact on the industry's underlying credit fundamentals over the near- to intermediate-term, according to a new outlook report by Fitch.
The rating outlook for the U.S. life insurance sector is stable for 2017, based on our expectation that key credit metrics will remain in line with rating expectations over the next one to two years.
The stable rating outlook reflects the industry's strong balance sheet fundamentals, very strong liquidity, disciplined asset-liability matching, and operating performance that remain generally in line with rating expectations. Over the past year, expected deterioration in corporate credit exposure has been manageable in the context of the industry's capital and earnings.
"Key macroeconomic challenges expected to impact U.S. life insurers in 2017 include sustained low interest rates, financial market volatility, and weakening conditions in the credit markets," said Douglas Meyer, Managing Director, Fitch Ratings.
While Fitch expects a modest increase in interest rates in 2017 under our base case scenario, we expect further decline in the industry's interest margins and reserve adequacy due to low reinvestment rates and limited crediting rate flexibility on legacy in-force business.
Credit-related investment losses are expected to increase somewhat in 2017 under our base case scenario but remain somewhat below historical averages and pricing levels. Key credit concerns that could lead to higher than expected losses include continued weak commodity prices, lower-than-expected economic growth, the impact of expected Fed rate hikes, and increasing geopolitical risk.
Sustained low interest rates would likely cause Fitch to revise its rating outlook to negative. This could occur within two to three years based on a 1.5-2.0 percentage point deterioration in the industry's GAAP ROE. Over the past year, the industry's average ROE has been in the 11%-12% range. Conversely, a rise in interest rates by 100-150 basis points could ease the pressure on our rating outlook.
"Bond market repricing post-election reflecting the possibility of higher inflation and stronger economic growth in 2017 has been positive for U.S. life insurers. Nonetheless, low rate pressures that have impacted life insurers in 2016 are expected to persist into 2017," added Meyer.
The full report is available by clicking on the link.
Additional information is available at 'www.fitchratings.com'.
Related Research
2017 Outlook: U.S. Life Insurance (Macroeconomic Headwinds Persist)
https://www.fitchratings.com/site/re/890987
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