Things are looking up for life insurers. Moody's Investors Service today announced in its "U.S. Life Insurance: Outlook Returns to Stable" report that it upgraded its outlook for the U.S. life insurance industry to stable from negative. The ratings agency cited favorable economic and capital market trends, which signal the stabilization of life insurers' business and financial prospect.

Moody's said elevated stock prices have buoyed life insurers' variable annuity and asset-based businesses, moderating corporate defaults and bond rating transitions will continue to assist profits and regulatory capital levels. Additionally, the rating agency expects the gradual improvement in U.S. employment and consumer spending to create more demand for life insurance products. Plus, life insurers are expected to show improved investment income, operating income and net profits, leading to stronger internal capital generation.

The likelihood of a downside stress scenario occurring and its adverse impact on the life industry, which had underpinned the negative outlook since October 2008, are now diminished, given the improving environment and the significant additional capital and liquidity buffers raised by the industry in recent quarters, Moody's added.

"Although we expect the economic recovery to remain sluggish and vulnerable to global market disturbances, we believe that the underlying trends indicate stability for the financial prospects and credit profile of the U.S. life insurers over the medium-term," said Laura Bazer, a Moody's VP and senior credit officer, and author of the report. "U.S. life insurers are simply in a much better position now than they were a year ago to weather a second downturn, should one occur."

Despite the optimism, Moody's warns that areas of weakness and concern for the industry still remain. Moody's expects life insurers to face higher-than-average asset losses in 2010 and 2011, particularly from real estate-related assets (i.e., commercial mortgage loans, commercial mortgage-backed and residential mortgage-backed securities).

"Moody's has increased its expected loss projections for the hard-hit real estate sector due to continuing asset performance deterioration," Bazer said, "however, these losses will remain manageable for insurers as their operating earnings and capital generation continue to improve."

While new variable annuity (VA) products with guarantees have been re-priced and de-risked, Moody's remains concerned that the in-force blocks of VA liabilities remain volatile and vulnerable to a downside stress scenario, given that not all VA risk exposures are hedged and that certain risks simply cannot be effectively hedged (i.e., uncertain policyholder behavior).

At present, Moody's said about one-third of its rated life insurance issuers have negative outlooks, following a significant number of downgrades in 2008 and 2009. But the agency said many company outlooks should return to stable over the coming months, at a pace determined by each company's credit profile and the expected impact of the on-going trends and risks on the companies.

The report is available on



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