Moody's Ratings has issued a stable outlook for the U.S. life insurance sector for 2025, reflecting a positive economic environment. The U.S. economy is expected to grow by 2% in 2025 and 1.8% in 2026, which is anticipated to support the life insurance market's stability. Long-term interest rates are projected to remain elevated, which will boost investment income for insurers, with U.S. 10-year Treasury yields expected to stay above 4% in 2025. Furthermore, the Federal Reserve is likely to lower the federal funds rate by 25 basis points, pausing at a range of 3.5%-3.75% in mid-2025 [a7e2971e].
In terms of sales, annuity sales for 2024 are projected to reach $331 billion, marking a 22% increase year-to-date. However, life insurers are facing challenges, particularly credit deterioration in their commercial real estate portfolios. The increasing use of offshore reinsurance is raising counterparty risk, which could pose additional challenges for the sector [a7e2971e].
Despite these risks, partnerships with private capital are expected to support growth in the industry. Regulators are focusing on asset-intensive products and the associated investment risks, which could impact how life insurers operate moving forward. Overall, while the outlook remains stable, the sector must navigate these emerging challenges carefully [a7e2971e].
In conjunction with the life insurance outlook, the U.S. commercial insurance market is also projected to maintain a stable outlook for 2025, as noted by AM Best. Strong underwriting performance and improved investment returns are expected to bolster profitability, despite challenges such as elevated casualty claims driven by social inflation and rising property claims costs. The commercial lines insurers' combined ratios averaged in the mid-90s through Q3 2024, indicating favorable underwriting results [d33f67f4].
Adding to the positive economic narrative, Moody's has also highlighted a benign economic environment for 2025 that will support consumer and commercial assets backing securitizations. Economic growth, falling interest rates, and inflation nearing targets are expected to benefit most asset-backed securities (ABS). However, challenges remain for consumer financials, particularly from rising prices and a cooling labor market, which may affect U.S. consumer credit performance into early 2025. Auto loan ABS, in particular, is projected to experience high collateral losses due to elevated monthly payments and a weak used-car market. Additionally, credit card ABS charge-off and delinquency rates are expected to rise, although they are buffered by strong credit quality [41e5023c].
Both sectors are adapting to evolving risks, with insurers increasingly adopting innovative technologies for data analysis and operational efficiency to mitigate inflationary pressures affecting underwriting margins. The overall sentiment across both life and commercial insurance markets suggests resilience amid emerging risks [d33f67f4].