(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings].)
This report does not constitute a rating action.
What’s Happening
S&P Global Ratings believes there is a high degree of uncertainty and unpredictability on the markets’ direction, on policy implementation, and the overall impact on rated North American insurers. The announcement of sweeping tariffs by the U.S. administration as well as their temporary pause on April 9 has sparked significant turbulence in the global markets. Equity and bond markets reacted swiftly earlier this week with major indices trending downward and coming off its worst week since the start of the pandemic in 2020. The upswing today was reflected as one of the best days for the equity market since 2008. The length and velocity of the market movements will be important for the investment portfolio of insurers because, typically, short-term market fluctuations are displayed in the insurers' quarterly financial reports.
Erosion of market value could have a significant impact on the insurance industry because, as the value of investments held by insurance companies declines, it can hurt their financial stability. Overall, however, we believe (re)insurers have better and more evolved risk management practices, including well-defined tolerance levels. In our view, insurers are well-positioned to handle the immediate impact of market downturns and have managed their portfolios amid market turbulence given their robust capital and liquidity buffers.
Why It Matters
In general, prolonged market weakness has the potential to impair the balance sheets of North American insurance companies. While diversified, insurers’ investment portfolios are exposed to equity market volatility through their equity investments. Nevertheless, the strong capitalization of the industry, on average, has proven a valuable buffer against market crises in the past. Capital is a bedrock to our credit fundamentals, and we believe capital strength among rated North American insurers is on solid footing. Coming into 2025, capital was at an all-time high for the North American insurance industry.
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Property/casualty
The most immediate impact of market volatility is the swings in equity markets and potential segments of the credit markets. As of year-end 2024, property/casualty (P/C) insurers' investment posture is largely made up of bonds and loans (55%), and equities (24%), with other invested assets making up the rest--a composition that has remained stable over the past few years. Their conservative and well-diversified portfolios have performed well with a strong investment yield of 3% on average for the past five years (2020-2024). This plays a crucial role in bolstering capital adequacy.
We expect to see limited credit losses from P/C insurers' fixed income portfolios in the near term because they are dominated by high-quality bonds, with nearly 95% in the investment-grade category over the past five years. However, their equity exposure (which represents an average of 26.4% of invested assets over the past five years) is more likely to impact capital adequacy given heightened equity market volatility.
While a decline in interest rates could benefit fixed securities valuations, P/C insurers' net investment income--primarily interest on bonds and dividends from stocks--could come under pressure. While the extent of the impact on capital will depend on the magnitude of the equity market fluctuations, we believe the robust capitalization of the P/C sector, along with stable underwriting margins, is well-equipped to endure a moderate level of market volatility.
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Reinsurance
The reinsurance sector entered 2025 with a strong capital position, bolstered by excellent underwriting performance in short-tail lines, solid net investment income, and recovering fixed income asset values over the past two years. As such, we believe the sector is well-positioned to manage the elevated natural catastrophe losses in the first quarter of 2025, alongside the recent financial market volatility. In addition, we believe even with a potential material drop in the equity portfolios, it remains absorbable within the industry capitalization buffer at the 99.99% confidence level.
Life
Life insurers tend not to have substantial holdings of public equities in their investment portfolios, and often hold none at all. They therefore typically have no material direct exposure to stock market volatility. Their exposure to equity markets comes indirectly, via the guarantees they write on certain retirement products, such as variable annuities with living benefit guaranties (VAs), and products that either fully or partially track equity indices, like fixed index annuities (FIAs) and indexed universal life (IUL). Life insurers regularly hedge most of the equity exposure in VAs, and virtually all of the equity risk of indexed products like FIAs and IUL. A decline in equity markets, even a sizable one, in and of itself is therefore unlikely to have a meaningful impact on life insurers’ capital, although some accounting effects of hedging programs might affect reported earnings.
However, we are closely watching potential secondary effects of a market downturn. Drops in interest rates, if significant enough, may hurt sales and profitability, as well as slow down mergers and acquisitions. If the downturn further pushes the broader economy into a recession, it could also hurt life insurers’ large bond portfolios because of the potential for impairments and downgrades. This could affect our view of capitalization. With all that said, there is currently no indication that market turmoil would indeed have such effects, and that the impact on interest rates have so far been minimal.
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Health
Downside equity market volatility will dampen the capitalization of certain health insurers, predominantly not-for-profit and mutual companies, which have up to 25%-30% of their invested assets in equity securities. In contrast, publicly traded, for-profit companies generally take on zero to limited equity market investment risk.
Potential capital deterioration from equity market volatility comes at a difficult time for the sector. About one-third of all ratings in the sector have a negative outlook, largely because of operating performance stress in multiple market segments (commercial, Medicare Advantage, and Medicaid). While many not-for-profit and mutual companies have strong-to-excellent capital adequacy (one of the reasons why they can take on equity market risk), a combination of sustained earnings weakness and capital deterioration in 2025-2027 could put some ratings at risk for a downgrade.
The broader economic impact of the tariffs will also present general recessionary-type risks (with partial offsets). Weaker employment conditions will dampen commercial group enrollment, though we could see higher enrollment in countercyclical segments, such as the Affordable Care Act marketplace and Medicaid (notwithstanding significant legislative changes to these programs). At the same time, we could see medical utilization temporarily spike if members expect massive layoffs, though medical utilization would eventually soften as consumers pull back on discretionary-type medical spending.
Separately, we view the recent news on Medicare Advantage (MA) rates for 2026 as a positive credit factor for the sector. The Centers for Medicare & Medicaid Services (CMS) announced that revenue for MA health plans for 2026 will increase by 5.06% (on average) for the sector, which is significantly higher than the preliminary rate of 2.23% that it previewed in February (and higher than negative rates in 2024 and 2025). For the sector, the rate increase should allow health plans more strategic flexibility in pursuing enrollment growth and/or earnings improvement in 2026. That said, higher rates will only be beneficial if companies price their products in a way that is sufficient to cover actual medical cost inflation, which has been elevated in recent periods.
What Comes Next
S&P Global Ratings believes that rated insurers will largely be able to withstand the market turmoil without an immediate impact to ratings or outlooks. While insurers have historically performed to our expectations even in times of distress, the tenor and pace of prolonged stress, combined with other insurance industry market challenges, will define ratings prospectively.
Most of sectors, except health insurance, have a stable outlook, driven in part by robust capital adequacy cushions and overall good credit fundamentals. We believe insurers will closely monitor capital to manage or mitigate effects from changing environments and be tactical about sources and uses of capital.
A prolonged period of heightened macroeconomic uncertainty or instability could give rise to changes in consumer behaviors such as postponing purchases of life annuities or investment products. Additionally, uncertain economic growth prospects could dampen commercial lines' premium growth rates. Furthermore, credit conditions could deteriorate should global trade tensions heat up, which inadvertently could weigh on insurers’ fixed income portfolio. We will continue to monitor our portfolio of rated insurers as the implication from policy implementations develops.
| Primary Contact: | Neil R Stein, New York 1-212-438-5906; neil.stein@spglobal.com |
| Secondary Contacts: | Patricia A Kwan, New York 1-212-438-6256; patricia.kwan@spglobal.com |
| Taoufik Gharib, New York 1-212-438-7253; taoufik.gharib@spglobal.com | |
| Carmi Margalit, CFA, New York 1-212-438-2281; carmi.margalit@spglobal.com | |
| James Sung, New York 1-212-438-2115; james.sung@spglobal.com | |
| Research Contributor: | Ronak Chaplot, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai ; |
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