Rising rates have been largely favourable for US life insurer investment portfolios, driving higher investment income as reinvestment rates exceed book yields.
According to Fitch Ratings, the rising rates have played a large role in helping to mitigate macroeconomic headwinds, market volatility and the heightened probability of mild recession in 2023.
Impairments are expected to rise modestly in 2023, but losses should remain benign across most asset classes.
Alternative investment income is expected to continue to normalize from record results in 2021. The increasing role of alternative investment managers in the life insurance industry has been largely neutral for insurers.
Credit fundamentals remain strong, with interest coverage and leverage at pre-pandemic levels, though market volatility is substantial, and the industry has material unrealized loss positions on fixed-income portfolios.
Continued macroeconomic volatility and mounting recessionary pressures will challenge market-based returns, eroding variable-rate investment income and fee-based income.
Insurers continued to increase exposure to less liquid, more esoteric asset classes such as private placements and commercial mortgage loans in search of yield and to capture illiquidity premiums during persistently low-rate environments, while maintaining 94% investment grade portfolios.
Fitch warns that the combination of regulatory/accounting changes and challenging macroeconomic conditions are driving major shifts in product strategies, with changes in the competitive landscape that may have longer-term credit implications for the industry.
Liquidity in credit markets initially declined during the COVID-19 pandemic as default expectations rose, widening credit spreads and resulting in opportunistic purchases.
Buying opportunities amid market volatility will depend in part on the asset class, product structure, and yield curve positioning.
Fitch noted that insurers have been focusing on liquidity and capital, often buying into higher-quality asset portfolios amid increasing recessionary pressures.