Fitch Ratings-New York-20 December 2024: North American life insurer credit losses will remain benign in 2025, despite modest increases due to ongoing pressure on commercial real estate (CRE) assets, reflecting secular shifts and macroeconomic trends, Fitch Ratings says. Commercial real estate losses will continue to gradually emerge but are expected remain within ratings expectations relative to capital.Commercial real estate exposure, while significant, is diversified across property types, geographies and maturities, with performance supported by track records of strong performance through multiple cycles based on disciplined underwriting. Expected credit loss reserves related to commercial mortgage loans have gradually increased due to higher capitalization rates and lower occupancy rates for office properties.
However, insurers with larger concentrations, particularly in office properties and those with higher volumes of near-term maturities, will be more at risk. We expect debt service coverage ratios to stabilize, but office properties will remain acutely pressured. Loan-to-value ratios are at near-peak levels but could see relief from declines in cap rates. We expect the National Association of Insurance Commissioners (NAIC) credit quality of mortgage loans, which has migrated downwards, to stabilize.Additionally, life insurers will continue to increase allocations to less-liquid assets, including private credit, due to the illiquidity and complexity of premiums, driven in part by the growth in their partnerships with alternative investment managers. While private credit investment risk will increase modestly, life insurers continue to have outsized exposure in investment-grade, fixed-income securities.Certain asset classes, such as leveraged loans, will continue to be pressured by the interest rate environment, though they are expected to largely weather the macroeconomic conditions and global uncertainties. Fitch will closely analyze the performance of these less liquid, less transparent and more esoteric investments in a credit market downturn.We expect stable profitability in 2025, despite the expected further decline in policy rates, with potential improvement in alternative investment returns offset by deceleration of increases in base portfolio yields. Strong balance sheets should partially mitigate potentially slowing economic growth, heightened macroeconomic volatility and geopolitical uncertainty.
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