Modest Improvement In Earnings Outlook For U.S. Life Insurers
August 29, 2013 by BUSINESS WIRE
CHICAGO–(BUSINESS WIRE)–Earnings headwinds associated with low interest rates and equity market volatility moderated in the first half of 2013, contributing to a modest improvement in Fitch Rating’s base case 2013 earnings outlook for U.S. life insurers.
The recent run-up in interest rates and equity market valuations, if sustained in the second half, would be primary drivers of the improvement. Longer term, industry earnings remain vulnerable to still low interest rates and uncertainty tied to the weak economic recovery in the U.S. and abroad.
Results through the first half were mixed, with some large insurers reporting strong improvement, while others were flat to down. The average operating return on equity improved to 11% from 10% for the full year 2012. The average operating return on assets was flat at 1.25%.
Asset-based fee income has been a significant positive due in large part to equity market appreciation and lower volatility. Net flows have also remained positive, although lower, in many lines, particularly variable annuities, where companies have pulled back on more generous guarantees. Lower equity market volatility also stabilizes asset based fee income and reduces the cost of equity market hedges.
Interest margins continue to hold up reasonably well due primarily to reduced crediting rates. While the uptick in interest rates in the first half of 2013 has provided some relief, Fitch expects further, albeit modest, spread compression for the balance of 2013 due to still low reinvestment rates on assets supporting in-force business and limited crediting rate flexibility.
Underwriting experience has been mixed. Higher claim costs associated with disability and long-term care continue to weigh on industry results and are expected to continue for the balance of the year. Further, select insurers have reported a deterioration in mortality experience to date, which Fitch views as normal random fluctuation that is not expected to continue.
The full report, ‘U.S. Life: Modestly Improved Earnings Outlook for 2013’ is available at ‘www.fitchratings.com‘ under the following headers:
Additional information is available at ‘www.fitchratings.com‘.
