The sky may be turning grey, but credit ratings agency Standard & Poor's (S&P) says US life insurers can weather the storm.
In a recently published report called "Cloudy, But Little Chance of Rain In 2016," S&P said it expects American life insurers will be able to maintain their credit quality over the next twelve months. This is due to their very strong capital, prudent risk management, and improvements to operational efficiency.
The report goes on to predict more mergers and acquisitions in the insurance industry during the year, as well as more share buyback activity. The ratings agency also believes the growth in asset-accumulation products will continue, and that the middle market will remain one of the best areas for growth opportunities. As for the investments that insurers hold, S&P thinks companies will face more difficulties because of illiquidity risk than they will from increases in credit risk.
"The clouds haven't parted just because the U.S. Federal Reserve raised the federal funds rate by 25 basis points in December 2015," comments Standard & Poor's credit analyst Deep Banerjee. He notes that US interest rates remain at historical lows which puts a squeeze on insurers’ profitability.
"Although the Fed's decision to increase short-term rates affirms the positive macroeconomic trend, it is not a game-changer for U.S. life insurers' investment yields," concludes S&P. "Life insurers mostly invest in long-dated assets. The shape of the yield curve will provide a better understanding of the market impact of the Fed's decision. We currently expect a relatively flat yield curve and low long-term rates in 2016."