Despite pressures from the sluggish economic recovery and low interest rates, the U.S. life insurance sector remains financially strong, characterized by high levels of capitalization, solid liquidity, high-quality investment portfolios, good financial flexibility and modestly improved profitability, according to Moody's Investors Service.

In its report, "U.S. Life Insurance — Industry Scorecard," Moody’s said the still-low interest rate environment will continue to compress spread margins for fixed annuities and universal life insurance, and pressure profits from long-tailed liabilities such as disability income, long-term care, payout annuities and variable annuities (VA) with guarantees.

Moody’s considers the diversity and control of life insurers’ distribution channels—which include captive agents, banks, independent marketing organizations, broker/dealers, financial planners and independent agents—to be consistent with the A rating range.

“We have observed a shift in focus of companies toward proprietary career agency channels and away from third-party distribution in order to gain more control,” Moody’s said in the report. “Examples include Allstate Life, which had previously sold a significant amount of fixed annuities through independent agents; Axa Equitable, which had previously sold VA products with rich guarantees through third party distributors; and Ameriprise, which had previously sold VA products in the independent agent channel. Mutual companies continue to exhibit success in selling participating whole life through their captive agents with good recruitment and retention of agents, while insurers with smaller scale continue to focus on third party channels such as independent marketing organizations, third-party administrators, brokerage general agencies and, increasingly, banks.”

Companies have re-risked investment portfolios in attempting to offset the impact of relatively low interest rates on earnings, says the rating agency, and volatility in earnings and capital resulting from aggressive guarantees in legacy variable annuity businesses remains a credit concern.

In addition, while Moody's expects overall investment credit losses in 2013 to remain at similar levels as 2012, greater losses could result if the U.S. government fails to raise its debt ceiling, there is negative impact from fiscal tightening, persistent weakness in Europe, a rise in U.S. unemployment or a reversal in the U.S. housing recovery.

In addition to macroeconomic risks, new regulatory uncertainty came to the fore in 2013 with the designation of AIG and Prudential (and MetLife likely to be designated) as non-bank systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council. Additional regulatory oversight and new, likely higher, capital requirements, which are still under development, will be a credit positive, the rating agency said. But the additional conservatism will also likely constrain companies’ product offerings, profitability and appeal to equity investors, and thus could somewhat limit their ability to compete in the marketplace.

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