US life insurers may get comfort in recovery, but response to low rates still bears high risks: Fitch

Improving economic conditions should be supportive for the US life insurance sector already relatively flush with capital, but low interest rates and pressure from alternative investment managers and regulators could still bear risks, Fitch analysts said in a report on the industry.

The ratings agency justifies its neutral outlook for the industry with reference to "improvement in the macroeconomic environment over the past year and strong industry balance sheet fundamentals.” Concerns from the economic fallout of the pandemic are fading.

Legacy guarantee and annuity products will face continued pressure from low interest rates and the resulting posturing of alternative investment managers, Fitch warned.

Interest rates will likely rise only fractionally in 2022 and continue to not only inform investment decisions, but redefine entire business and product strategies, Fitch noted.

"These factors are driving major shifts in product strategies, changes in the competitive landscape and increased M&A activity," authors noted. "Fitch expects further strategic shifts by US life insurers in response to sustained low interest rates."

That could mean deepened aversion to guaranteed and fixed-payout products or pressure on the capital and reserve margins wherever legacy products cannot be evacuated, analysts noted.

Private equity will likely continue to play a lead role in taking up those anathema lines.

"Fitch expects this trend will continue, with PE-affiliated life insurers continuing to capture market share in the retail fixed annuity market," analysts wrote. "Longer term, we expect PE firms to expand their reach in the U.S. life insurance industry into other long-duration insurance products."

On the investment side, managers could "overreach for yield in ways that increase downside risk to a large market shock," authors further warned. Investments in real estate continue to offer "considerable uncertainty," although earnings and capital are sufficient to handle any potential losses, authors warned.

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