NEW YORK: Insurance sector rating agency, AM Best has revised its market segment outlook on the U.S. life insurance and annuity (L/A) segment to negative from stable, due to the significant volatility and uncertainty in the financial markets created by the COVID-19 virus.
In AM Best’s view, the L/A industry maintains strong capital and liquidity resources. However, as detailed in a new Best’s Market Segment Report, the following key factors have led to the revised outlook:
A material acceleration in a global economic slowdown, increasing the expectation of dampened earnings throughout 2020 for spread and fee-driven businesses; and
A rapid further deterioration in the U.S. economy, paired with its direct impact on equities and interest rates, with a greater expectation of a longer path to sufficient improvements from record low levels for the 10-year Treasury yield, as well as a flattened yield curve.
The report, titled, “Market Segment Outlook: U.S. Life/Annuity,” notes that AM Best previously had stated that the benign credit environment could start to show cracks in 2020, but that the overall impact for most carriers was likely to be manageable.
However, because the financial markets have responded negatively and quickly to the outbreak of COVID-19, the longer-term economic impact remains uncertain.
As interest rates and the equity markets plummet, AM Best expects operating performance to move to the negative, driven by declining sales and intensifying spread compression.
In the United States, the Federal Reserve (Fed) cut the federal funds rate by 50 basis points on March 3, 2020, followed quickly by a further reduction on March 15 to a 0-25 basis point target range.
Concurrent with the latest action, the Fed launched a $700 billion quantitative easing program. The 10-year Treasury note fell below 50 basis points to a record low at one point this March, and remains below 1%.
AM Best anticipates that COVID-19 also will significantly affect the L/A industry’s ability to quickly move forward with costly innovation efforts.
Factors moderating these negatives include the industry’s strong capitalization and improved liquidity; stress testing that has better prepared the industry for downturns from economic and pandemic-type events; and credit spread widening to offset some of the interest rate decline.
Carriers with less capital, questionable liquidity access and limited business profiles or outsized exposures to at-risk sectors such as energy, retail, and travel, will feel the negative economic impact faster and more deeply than most of the industry.
For companies active in variable products, separate account assets will be marked to market, resulting in declines in asset-based fees. L/A insurers taking on higher degrees of investment risk and those with less-than-optimal asset-liability matching strategies are likely to be more negatively impacted as well.