Fitch Ratings revises 2020 North American life insurance outlook to negative

Fitch Ratings has revised its 2020 sector outlook for North American life insurers to negative from stable following the unexpected decline in interest rates over the past year. Although Fitch's sector outlook is now negative, Fitch expects ratings for North American life insurers to remain stable in the coming year.

"The recent return to lower interest rates will define 2020 for North American life insurers," says Doug Meyer, managing director. "While low rates will bleed into earnings over time, they affect our view of reserve and capital adequacy more immediately. Further, sustained low rates raises the risk that insurers overreach for yield in ways that increase vulnerability to a large unexpected market shock."

The majority of Fitch's North American insurance ratings are stable - a trend Fitch expects to persist in 2020 as key credit metrics remain in line with expectations. Fitch’s 2020 outlook reflects an expectation that the relatively benign credit environment will continue in 2020.

A large unexpected market shock could put stable ratings at risk. While this scenario is not incorporated into Fitch’s 2020 outlook, Fitch views this as inevitable at some point due to slowing economic growth, macroeconomic uncertainty tied to global trade and monetary policy, and late cycle credit market conditions.

The Fitch Ratings 2020 Outlook: US Life Insurance identifies four issues to watch in the coming year including: interest rate changes, a spike in high yield default rates, long term care (LTC) reserve charges, and regulatory and accounting developments.

While Fitch expects the relatively benign credit environment to continue in 2020, corporate defaults are projected to rise slightly. Life insurers have increased their exposure to 'BBB'-rated bonds - those on the cusp on sub-investment grade - and to investment-grade CLOs with exposure to leveraged loans, putting their investment portfolios at risk in a credit downturn.

Within the LTC insurance space, Fitch continues to believe that statutory reserving is based on overly aggressive assumptions and therefore insurers will continue to take reserve charges. For the vast majority of Fitch-rated life insurers, LTC exposure is manageable in the context of their liability structure and capital position, said Fitch.

Additionally, Fitch is watching regulatory and accounting issues and developments including proposed changes to statutory reserving and capital framework for variable annuities, proposed LTC premium rate increases, and the NAIC's use of private letter ratings.

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