Global economic recovery, declining jobless rates bode well for insurers: Moody’s

On the life insurance side, Moody’s says that, along with the support of economic recovery, the sector will also benefit from a declining emphasis on spread-based and guaranteed products, which will partly offset declining investment margins. And, the strong equity markets of 2014 will support the performance of fee-based products into 2015, it says.

Despite low interest rates and declining investment yields, Moody’s says that rising asset prices and changes in product mix have boosted life insurers’ profitability. It also notes that life insurers worldwide are increasingly diversifying into protection, fee-based products and asset management. And, it says that the ongoing strength in U.S. and Asian equity markets has diminished risk in the variable annuities business. Companies will also start 2015 with a higher level of assets under management, thereby benefiting from higher fees on their variable products and asset management businesses throughout the year, it adds.

Moody’s also expects that life insurers will continue to increase asset risk by investing in higher-yielding, less-liquid assets. However, it says this increase “will not be substantial enough to affect insurers’ credit profiles during the outlook period.”

“Most of our life insurance sector outlooks across the globe are stable, driven not just by the economic recovery and declining unemployment generally, but also by rising asset prices and an improved product mix, which will offset the effects of low interest rates,” says Benjamin Serra, vice president and senior credit officer at Moody’s. “A few outlooks for Europe remain negative, notably for the UK, Germany, and the Netherlands.”

Moody’s says that it expects that consumers’ higher disposable income, due to global growth driven by the U.S. and emerging markets, will support the sales of life insurance savings and protection products. In Europe, however, it cautions that challenges for life insurers persist due to still-high unemployment levels in France and Italy, and uncertainty stemming from legislative changes, especially in the UK.

Indeed, the rating agency notes that both the life and P&C sectors face significant changes in both local and global insurance regulation. Moody’s says it considers the proposed regulatory frameworks a credit positive, given higher capital requirements and a more holistic approach to complex groups. However, it says that uncertainty about the nature and timing of specific rules may limit insurers’ business and financial flexibility.

On the P&C side, Moody’s also expects economic growth to help power industry sales. “We expect P&C premiums to keep pace with economic growth in advanced economies and to outpace economic growth in emerging economies, which
supports our stable sector outlook,” says Bruce Ballentine, vice president and senior credit officer at Moody’s. “We see P&C penetration rates holding steady in advanced markets and rising gradually in emerging markets.”

The rating agency also says that low interest rates provide a benefit by promoting underwriting discipline. It notes that P&C insurers’ balance sheets are generally sound, “characterized by high-quality investments, adequate reserves and good capitalization.” P&C insurers also benefit from the mandatory nature of major business lines, such as auto and home insurance, it adds.

Moody’s expects P&C premiums to grow in the low single digits in North America and most of Europe, and considerably faster in emerging markets, which it says will provide attractive opportunities for growth in 2015, albeit at a slower pace than in recent years.

Among the emerging markets, Moody’s says that it expects that China’s nominal P&C growth rate will ease to the mid-double digits; and, that in Latin America, the P&C growth rate could ease with the slowdown in the region’s economies, but nominal premium growth is likely to remain in the mid-single digits. While emerging markets carry unique risks, Moody’s says that Latin America offers an improving insurance operating environment along with healthy growth potential.

On the downside, the industry also faces a number of fundamental challenges, Moody’s says, including: the risk of natural and man-made catastrophes, pricing/reserving for long-tail lines, and an uncertain regulatory environment. “P&C insurers have managed to withstand the effects of several major catastrophes in the past decade, with capital levels holding up well, but they are closely tracking climate change and potential rising sea levels, which could result in more severe events,” it says.