The good news is there are signs of economic improvement. The bad news is A.M. Best is maintaining its negative rating outlook on the life/health industry.
According to the rating agency’s recent report, “Mixed Signals: Has the Economy Begun Its Recovery?” despite signs of economic recovery, financial institutions’ loan portfolios have yet to generate the full measure of expected losses, and that same potential holds true for U.S. life/health companies.
As we enter 2010, it appears the deepest U.S. recession in decades is showing some signs of improvement. A.M. Best accepts the consensus view of respected economists surveyed in a report from the National Association for Business Economics, which states the U.S. economic recovery has begun. Credit spreads have narrowed considerably for most asset classes, especially corporate bonds, non-housing related asset-backed securities and agency mortgage-backed securities.
However, A.M. Best’s says its view reflects concerns regarding the sustainability of the positive trends (i.e., the shape of the economic recovery), as well as the potential for volatile equity markets and headline investment risk within commercial real estate as the credit cycle unwinds. Economic growth is likely to be moderate and that it will be several years before the economy returns to “normal,” according to the rating agency. This belief is further underpinned by the fact that unemployment is expected to remain at elevated levels. The continued potential for further deterioration in financial institutions’ loan portfolios and the limited flexibility of interest rates are also factors, the company says.
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