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It’s been a long, slow road, but finally positive news reports are surfacing regarding the state of the U.S. life insurance industry. Recent evidence of a rebound can be find in the action Moody’s has taken, upgrading its outlook on the industry from negative to stable.

Moody’s gives the following reasons for the optimistic outlook:

* Rising interest rates should continue to relieve pressure on life insurers’ profits. Higher interest rates will ease spread compression in spread-dependent businesses, like fixed annuities and universal life, and move long-term investment returns closer to reserve and pricing assumptions for long-tailed products, like long-term care and long-term disability income. The need for statutory reserve increases and GAAP intangible write-downs will diminish.
* Economic stability supports greater insurance purchases. Receding economic headwinds will ease discretionary spending pressures on U.S. households, translating into higher life and annuity premiums and deposits to pension plans, lifting pressure on insurers’ revenue and earnings growth.
* Rising equity markets will continue to improve the performance of variable annuity (VA) portfolios and other AUM-fee driven businesses. The profitability of legacy VA portfolios will continue to improve as equity markets and interest rates rise. Fees from rising pension plan and mutual fund assets under management will also continue to rise. However, equity market and VA earnings volatility will remain in the picture, and policyholder behavior vis-a-vis lapses and the utilization of their guaranteed benefits will remain a wildcard for hedging and reserving.

According to Moody’s, the U.S. economy will continue to show greater stability over the next two years, expanding 2 to 3 percent in 2014 and 2.5 to 3.5 percent in 2015, which is credited to the continued improvement of the housing market and unemployment rate. With this, Moody’s sees a rise in the demand for life insurance and annuity products.

“Fixed annuities, whose sales had been beaten down in the last two years as interest rates headed downward, are starting to turn around in 2013,” the report states. “Although sales were still 6 percent lower during the first half of 2013 compared with the same period of 2012, the decline appears to have bottomed out and sales were 13 percent higher in the second quarter of 2013 than the first. We expect the turnaround to strengthen in 2014.”

The projected rise in interest rates will especially benefit annuity products with long-term guarantees (e.g., payout annuities, structured settlements); old blocks of individual fixed annuities with high guaranteed rates; life insurance products with embedded interest rate guarantees (e.g., universal life insurance policies); and certain specialized long-tailed health products (long-term disability; long-term care).

Moody’s does caution that not all insurance products will see a brighter future. Disability income, for example, will take more time to show improvement. Moody’s also expects sales of health-related products to remain constrained by the ever-evolving implementation of the Patient Protection and Affordable Care Act.

Overall, this is great news for life insurers who have suffered at the hands of the Fed and years of depressed interest rates. According to Moody’s, there is hope for the future.

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