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S&P: US life insurers more resilient against possible economic downturn

S&P Global Ratings is maintaining a stable outlook on the U.S. life insurance industry for 2020 even though interest rates will likely remain low for the foreseeable future.

U.S. life insurers are offsetting some interest-rate pressure from older investments with higher yields, but that support on portfolio-earned rates is beginning to wane, the rating agency said. The sector still enjoys a strong liquidity profile amid its hunt for more illiquid assets in its pursuit of yield. But S&P Global Ratings warned that the combination of a rise in investments with less-liquid attributes and higher-than-expected lapses or collateral-posting requirements may result in negative credit impacts on individual insurers.

Though the sector still has some sensitivity to equity risk should the U.S. economy go into a recession, the effects will be more moderate compared to the prior market downturn. The rating agency based this assessment on most insurers' active liability management, increased hedging practices and capital buffers.

S&P also said that while capitalization remains a key strength of the industry, it has reached its peak. Current capital levels have placed life insurers in a better position if something similar to the Great Recession from 2007 to 2009 occurs.

On the M&A front, block transactions, or insurers selling small parts or blocks of their operations, will continue to be prevalent.

Additionally, S&P said life insurers could adopt new strategies over the longer term because of upcoming accounting and regulatory changes. These include changes to the National Association of Insurance Commissioners' rules for variable annuity reserves and capital requirements effective 2020. The impact will depend on the type of variable annuity with living benefits that insurers have in their portfolios.

The industry could benefit from the passage of the SECURE Act, which would make it easier for small businesses to offer 401(k) plans by allowing them to offer retirement savings in groups. The measure is widely expected to encourage inflows into annuities.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.