|[August 27, 2013]
Fitch: Modest Improvement in Earnings Outlook for U.S. Life Insurers
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.
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'.
Applicable Criteria and Related Research: U.S. Life: Modestly Improved
Earnings Outlook for 2013
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