CHICAGO--(BUSINESS WIRE)--The Rating Outlook for the U.S. life insurance industry is Stable for 2016, according to Fitch Ratings. In addition, the fundamental sector outlook is stable. Fitch's outlook considers the industry's very strong balance sheet fundamentals, strong liability profile, and stable operating performance.
These positive factors somewhat mitigate Fitch's ongoing concerns over persistent low interest rates that will continue to pressure interest margins and reserve adequacy in 2016. Fitch expects continued earnings pressure in 2016 due to reduced interest margins, which will offset modest growth in fee and underwriting income.
Credit-related investment losses are expected to increase in 2016 under Fitch's base case scenario but remain somewhat below historical averages and pricing levels. Key credit concerns that could lead to higher than expected losses include continued weak commodity prices, softening global demand, the impact of Fed rate hikes and increasing geopolitical risk.
Fitch expects reported statutory capitalization, which exceeds both pre-crisis levels and rating expectations, to remain near current levels in 2016, driven by retained earnings and modest growth in in-force business. Further, Fitch continues to view the industry's liquidity profile as strong, despite increased exposure to less liquid investments.
Legacy variable annuity (VA) risk has diminished somewhat due to improved equity market conditions in recent years, but continues to be a source of reserve and capital volatility as experienced in the second half of 2015. Longer term, Fitch remains concerned about tail risk associated with the product's living benefit guarantees, which could cause a material hit to industry earnings and statutory capital in a severe stress scenario.
Fitch believes that a rise in interest rates by 100 bps to 150 bps could have positive implications for our sector outlook for U.S. life insurers. Conversely, if interest rates decline to levels seen in late 2012 (i.e, 10-year treasury below 1.75%) and stay low much beyond 2016, Fitch would likely change its outlook to negative based on a weakened earnings profile and anticipated capital impacts associated with reserve strengthening.
The full '2016 Outlook: U.S. Life Insurance' is available at 'www.fitchratings.com' or by clicking the link below.
Additional information is available at 'www.fitchratings.com'.
2016 Outlook: U.S. Life Insurance (Low Interest Rates Remain an Earnings Headwind)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874979
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