The second half of 2005 is likely to pose challenges for life insurers says Standard & Poor’s Ratings Services in a new report.

“The U.S. life insurance industry has taken solid strides in improving risk management, which has nicely served to counteract many of the traditional and fresh pressures that this sector faces,” explains Standard & Poor’s credit analyst Timothy Clark. “This has supported the positive rating trends of the past six months, leading Standard & Poor’s to retain its stable ratings outlook for the balance of 2005. Yet 2005 is seen as a transitional year as the sector embraces many positive developments while coming to terms with several challenges that are now coming into focus.”

The sector has seen a healthy earnings recovery with solid revenue potential and very strong capitalization, Standard & Poor’s says. It sees the potential for greater earnings stability for this sector over the near term “as refinance risk is becoming less of an issue, due to the fact that products are increasingly being sold in multi-years of four-, five-, or seven-year increments instead of one. Corporate bond defaults remain low, but that could begin to change in 2006.”

The last half of 2005 is expected to be a transitional time for U.S. life insurers, it cautions. “We expect to move gradually out of the low interest rate environment, although meaningful improvement in earnings due to spread income will probably not come until 2006. Increased regulatory scrutiny will likely result in more subpoenas to answer and more litigation to defend or settle,” the rating agency says. “Many of these issues could see resolution in 2006, but as there is the potential for corporate bond defaults to begin to rise later in 2005, the current positive momentum might be difficult to sustain.”