Fitch Ratings says that it has a neutral sector outlook for North American insurers next year, saying that they will continue to benefit from rising interest rates and balance-sheet strength.
This should partially mitigate volatile macroeconomic conditions and its economists’ expectation for a mild recession that is expected to result in higher credit losses.
It also said that credit losses remain benign for the industry, though volatility is substantial, and the sector has moved into material unrealised loss positions on fixed-income portfolios.
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. 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 will continue to normalise from record results in 2021.
It also stated that the increasing role of alternative investment managers in the life insurance industry, regulatory and accounting changes, and dynamic macroeconomic conditions are driving major shifts in product strategies, changes in the competitive landscape, and increased M&A activity.
These may have longer-term credit implications for the industry.
The proportion of Stable Outlooks increased six percentage points YoY, with 92% of them being stable. This was, it said, a ‘material increase’ compared to two years ago when coronavirus fears led to nearly 30% of US insurers ratings being on Negative Outlook or Negative Watch.