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Fitch Ratings Maintains Stable Outlook on US Life Insurance Industry

Despite a significant change in credit fundamentals for the U.S. life insurance industry, Fitch Ratings continues to have a stable outlook for the sector.

Fitch last changed its rating on the life insurance industry in September 2002, when it upgraded its outlook to stable from negative. At that time, its pessimistic assessment had been in place for four years.

At the SVIA Forum, Fitch managing director Julie Burke said the insurance industry continues to benefit from a good balance sheet: strong statutory capitalization, moderate use of debt leverage, good asset quality and a stable, long duration liability profile. Of the approximately 200 mostly large, diversified insurance companies in the Fitch universe, only a handful carry BB (moderately weak) or B (weak) financial strength ratings. More than 120 are rated AA (very strong), with most of the rest rated A (strong).

The number of ratings downgrades in the life insurance industry exceeded the number of upgrades over the past five years by a sizable 2-to-1 margin in the first half of 2005. Burke said that a change has occurred and the outlook now is for downgrades and upgrades to be about equal.

Looking ahead to 2006, Burke also made several other predictions including an uptick in mergers and acquisitions in the life insurance industry, moderate credit-related bond losses, an uptick in real estate-related delinquencies, a shake out in the variable annuity market, and rising reinsurance costs. She also expects still more compression of the interest-rate spread that insurance companies earn on monies they receive from policy premiums, versus payments on variable annuities and other floating-rate products.

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