Moody’s Investors Service has raised its outlook on the U.S. life insurance industry to stable from negative, amid expectations that interest rates will continue to creep higher and the U.S. economy will improve in the year ahead.
The rating agency said today that its outlook change is driven by its expectation that interest rates will gradually rise in 2014, and that slow improvement in U.S. economic growth rates and employment levels will continue as well.
“Rising interest rates and the improving economy support our view that industry downside risks have diminished and will allow revenues and earnings to stabilize over the next 12 to 18 months,” said Laura Bazer, a Moody’s vice president and senior credit officer.
Moody’s says that higher interest rates will ease spread compression in spread-dependent businesses, such as fixed annuities and universal life. Higher rates will also bolster long-term investment returns so that they are closer to insurers’ reserve and pricing assumptions for long-tailed products, namely long-term care and long-term disability income products.
Additionally, the rating agency says that insurers’ revenue and earnings growth “will benefit from receding economic headwinds that ease discretionary spending pressures on U.S. households and translate into higher life and annuity premiums and deposits to pension plans.”
And, it suggests that rising equity markets will continue to improve the performance of variable annuity portfolios, particularly for troubled legacy blocks; as well as for other asset-based businesses, such as group pensions and mutual fund businesses.