Fitch Ratings has a neutral sector outlook for North American life insurers for 2023, as insurers will continue to benefit from rising interest rates and balance-sheet strength, which should partially mitigate volatile macroeconomic conditions and our economists’ expectation for a mild recession that is expected to result in higher credit losses.
Credit losses remain benign for the industry, though volatility is substantial and the sector has moved into material unrealized loss positions on fixed-income portfolios. However, the majority of liabilities are priced on a nominal basis, and the effect of the persistently high inflation is expected to remain within ratings expectations.
Near-term funding risk for the sector remains low despite the rapid rise in interest rates and widening credit spreads. The industry continued to take advantage of historically low interest rates through early 2022 to pre-fund upcoming maturities, and near-term refinancing needs remain low. Fitch is confident that insurers will be able to pay-down or refinance upcoming maturities without breaching sensitivities.
Life insurers are still able to shed legacy non-core and capital- intensive business lines through divestitures and reinsurance. Appetite for spread-based liabilities continues to be robust, boosted by private-equity backed insurers with asset origination capabilities.
Alternative investment income is expected to remain measured and continue to normalize from record results in 2021. The increasing role of alternative investment managers in the life insurance industry, regulatory/accounting changes and dynamic macroeconomic conditions are driving major shifts in product strategies, changes in the competitive landscape and increased M&A activity, which may have longer-term credit implications for the industry.
Ninety-two percent of North American life insurance Rating Outlooks are Stable, a six percentage-point YoY increase. This is a material improvement from 2020, when uncertainty about the implications of the coronavirus peaked, when nearly 30% of North American life insurers’ ratings had a Negative Outlook or were on Negative Watch.