Moody’s Ratings has issued a stable outlook for the US life insurance sector in 2025, citing steady economic growth, and sustained high interest rates as key drivers.
Moody’s forecasts that the US economy will grow at a pace of 2% in 2025 and 1.8% in 2026, while also expecting long-term interest rates to remain elevated.
As a result, this environment is anticipated to boost investment income and drive product sales, despite challenges including weaknesses in commercial real estate and rising asset risks.
In addition, the agency also projects that US 10-year Treasury yields will remain above their long-term equilibrium level of around 4% in 2025. The Federal Reserve is expected to lower the fed funds rate by 25 basis points at upcoming meetings, pausing when the rate reaches 3.5% – 3.75% in mid-2025.
“This should help drive the top line of a sector focused on increasing growth. Private capital insurers largely have focused on annuities, while mutual insurers continue to invest for the long-term, leveraging their distribution networks,” the agency said.
The sustained rate environment is projected to boost growth across the sector. In fact, the agency noted that higher interest rates and market volatility have contributed to the appeal of fixed annuity products, particularly fixed-rate deferred (FRD) and fixed indexed annuities (FIA).
Annuity sales for 2024 are also on pace for another record-setting year, with $331 billion year-to-date through Q3 2024, up 22% from the same period last year, Moody’s added.
Meanwhile, fixed income portfolios across the sector remain diversified and resilient against near-term economic or market adversity. But, private investments, including private structured credit, could be tested in the next credit downturn.
According to Moody’s, life insurers are expected to face credit deterioration over the next several years in their sizable commercial real estate portfolios, and asset risk from potential rating downgrades and higher defaults.
Furthermore, Moody’s highlights that while balance sheets across the sector remain strong, companies are increasingly using offshore reinsurance, which helps them to manage their business more economically, however this raises counterparty risk and often reduces capital too.
In spite of this, Moody’s expects operating company capital levels to remain sufficient through 2025 to help absorb emerging asset risks and continued weakness in commercial real estate.
US regulators are also increasing their focus on life insurers’ asset-intensive products, reinsurance activities and investment risks. It’s worth noting that this comes as companies continue to use reinsurance as a strategy to manage business economically, even as it raises concerns about transparency and counterparty exposure.
Lastly, Moody’s also flagged the role of private capital partnerships within the life insurance sector, which have seen significant growth in recent years. These partnerships, notably among alternative asset managers and insurers, are expected to support continued growth while presenting new dynamics for capital allocation and risk management.
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