Moody's has issued a stable outlook for the US life insurance sector in 2025, citing steady economic growth and sustained high interest rates as key drivers.
The agency forecasts US economic growth at 2% in 2025 and 1.8% in 2026, while expecting long-term interest rates to remain elevated. This environment is anticipated to bolster investment income and drive product sales, despite challenges such as weaknesses in commercial real estate and rising asset risks.
Moody's projects that US 10-year Treasury yields will remain above 4% in 2025, supported by a gradual easing of monetary policy. The Federal Reserve is expected to lower the fed funds rate by 25 basis points at upcoming meetings, pausing mid-2025 when the rate reaches 3.5% to 3.75%.
The sustained rate environment is expected to enhance growth across the sector, particularly in annuities, a focus area for private capital insurers. Mutual insurers, meanwhile, are leveraging long-term investments and robust distribution networks to sustain their operations.
Fixed income portfolios within the sector remain diversified and resilient against near-term market fluctuations, according to Moody's. However, private investments, including structured credit, are increasing as a share of insurers’ portfolios, and their performance may be tested in future credit downturns.
Additionally, life insurers face potential credit deterioration in commercial real estate holdings over the coming years, as well as risks from potential rating downgrades and higher default rates.
Moody's also highlighted that while balance sheets across the sector remain strong, the growing use of offshore reinsurance to manage costs introduces counterparty risks. Offshore reinsurance often reduces capital levels, which could heighten vulnerabilities.
Despite this, Moody’s expects operating company capital levels to remain sufficient through 2025 to absorb emerging risks.
US regulators are increasing their focus on life insurers' asset-intensive products, reinsurance activities, and investment risks, Moody’s noted. This comes as companies continue to use reinsurance as a strategy to manage business economically, even as it raises concerns about transparency and counterparty exposure.
Moody’s also pointed to the role of private capital partnerships in the life insurance sector, which have grown significantly in recent years. These partnerships, particularly among alternative asset managers and insurers, are expected to support continued growth while presenting new dynamics for capital allocation and risk management.
Overall, the stable outlook reflects Moody's view that the sector is well-positioned to navigate a competitive and volatile environment, driven by strong capital positions, investment income opportunities, and regulatory oversight. However, emerging asset risks, including challenges in commercial real estate, will require ongoing attention from insurers.
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