Stable outlook for life companies

North America

Rating agency Moody’s has described the outlook for the US life insurance industry in 2008 as stable. Moody’s noted that life insurance companies, although currently in good financial shape after two profitable years, faced some significant challenges. Overall, the agency takes the view that the industry, by adopting the appropriate strategic priorities and risk management programmes, particularly regarding life insurers’ activities within the capital markets areas, should be able to mitigate most of the negative factors that are likely to affect the industry in 2008. In summary, Moody’s describes the positive factors as the industry’s good profitability, supported by strong business structures and product diversity. Other positive factors are the industry’s financial flexibility and liquidity as evidenced by modest levels of debt, with more than enough excess capital to support merger and acquisition activity and share repurchases. Significantly, the agency describes the exposure of life insurers’ investment portfolios to the current crisis in the sub-prime mortgage market as modest. However, the key to the industry’s success over the previous two years – i.e. equity based life insurance products (particularly individual variable annuities and group pension products) will also provide the greatest challenge for insurers over the coming year. The economic stresses induced by the credit crunch are likely to drag the equity markets down in 2008.