Rising interest rates and balance-sheet strength will help buffer North American life insurers from the volatile macroeconomic conditions of the coming year, Fitch Ratings has predicted, leading the agency to propound a neutral sector outlook for 2023.
While the outlook from Fitch Ratings took into account economists’ expectations for a mild recession – and consequently higher credit losses – next year, it said it believes these losses would be ‘partially mitigated’ by interest rate hikes as well as the balance sheet strength of North American life insurers. As a result, 92% of the sector earned ‘stable’ rating outlooks – a 6% increase from the previous year and a vast improvement from 2020, when nearly one-third of the sector’s ratings either had a negative outlook or were on Fitch’s negative watch.
#FitchRatings has a neutral 2023 sector outlook for North American #LifeInsurance, as insurers will continue to benefit from rising interest rates and balance-sheet strength. See our 2023 #CreditOutlook: https://t.co/acm5tfX5Uo
See our #FitchOutlooks2023: https://t.co/mX5dBmmNoH pic.twitter.com/YdXGuQn3Ei
— Fitch Ratings (@FitchRatings) December 1, 2022
According to Fitch, credit losses were still benign for the North American life insurance industry. The near-term funding risk for insurers also stayed low despite the accelerated interest-rate hike and widening credit spreads, as the industry continued to reap the benefit of record-low interest rates through early 2022 to pre-fund, upcoming maturities. As near-term refinancing needs also remained low, Fitch Ratings was confident that the region’s life insurers would be able to refinance or pay-down upcoming maturities without breaching sensitivities.
Fitch Ratings described market volatility as ‘substantial’, forcing the North American life insurer sector into material, unrealized loss positions on fixed-income portfolios. Still, the majority of its liabilities were priced nominally, and even the effects of persistently high inflation were predicted to stay comfortably within ratings expectations.
Fitch Ratings also reported a ‘robust’ appetite for spread-based liabilities supported by private-equity insurers capable of asset origination, and a continued capacity to shed non-core and capital-intensive business lines among life insurers through reinsurance and divestiture.
Fitch expected alternative investment income to continue its trend towards normalization from the record results registered in 2021, and noted the increasingly prominent role alternative investment managers played in the life insurance sector.
Regulatory changes, ‘dynamic’ macroeconomic conditions, and increased M&A activity were driving major shifts in product strategies across the market and would likely bear longer-term credit consequences for the industry, Fitch concluded.