Moody’s has forecast a stable outlook for the U.S. life insurance sector in 2025, crediting steady economic growth and sustained high interest rates as pivotal factors.
Economic Growth and Interest Rates Set the Tone
The agency anticipates U.S. economic growth to reach 2% in 2025 and 1.8% in 2026, alongside persistently elevated long-term interest rates. These conditions are expected to drive increased investment income and product sales, even as challenges such as weaknesses in commercial real estate and rising asset risks loom.
Moody’s predicts the 10-year Treasury yield will stay above 4% in 2025, aided by a gradual easing of monetary policy. The Federal Reserve is expected to reduce the federal funds rate by 25 basis points over several meetings, stabilizing mid-2025 at a range of 3.5% to 3.75%.
Opportunities and Challenges for Growth
This stable rate environment is projected to stimulate growth across the sector, particularly in annuities, which have become a key focus for private capital insurers. Mutual insurers are also expected to thrive by leveraging their long-term investments and robust distribution channels.
While fixed income portfolios remain diversified and resilient to near-term market changes, Moody’s notes a growing reliance on private investments like structured credit. These investments could face pressure during future credit downturns, posing a potential risk.
Rising Concerns: Real Estate and Offshore Reinsurance
Life insurers are also grappling with potential credit deterioration in their commercial real estate holdings, coupled with the risks of higher default rates and potential credit rating downgrades.
Additionally, the growing use of offshore reinsurance as a cost-management strategy has introduced counter-party risks. Although this practice reduces capital levels, Moody’s expects operating company capital to remain adequate through 2025, even in the face of emerging risks.
Regulatory Oversight and Private Capital Partnerships
Regulatory bodies are ramping up scrutiny of asset-intensive products, reinsurance practices, and investment risks in the sector. Companies increasingly turn to reinsurance for economic efficiency, but this trend raises concerns about transparency and counter-party exposure.
Private capital partnerships have also gained traction in recent years, particularly among alternative asset managers and insurers. These partnerships are poised to support continued growth while introducing new complexities in capital allocation and risk management.
A Stable Path Forward
Moody’s stable outlook reflects the sector’s resilience amid a competitive and volatile environment. Strong capital positions, investment income opportunities, and vigilant regulatory oversight position the U.S. life insurance industry for steady growth. However, emerging risks—especially in commercial real estate and private investments—demand continued attention from insurers.
Overall, the report underscores a cautiously optimistic future, where the sector can capitalize on opportunities while navigating evolving challenges.
Ref: Moody’s https://www.moodys.com/web/en/us/insights/credit-risk/outlooks.html
