The rating outlook for the U.S. life insurance industry will remain stable despite the continuing recession and the fallout from the September 11 attacks, according to Moody’s Investors Services

Analysts at the rating agency believe that industry consolidation will resume in 2002 and beyond as firms seek to strengthen their strategic positions to meet new competitive challenges.

Moody’s believes that the industry’s many strengths, including sound asset quality, predictable and strong premium flows, and low financial and operating leverage will continue to provide support for the industry’s ratings.

“The U.S. life industry appears to have emerged from the September 11 catastrophe in relatively sound financial shape. With the exception of a small number of firms that had a high concentration of exposures to September 11, U.S. life insurers’ earnings and capital positions will not be materially affected by mortality and morbidity claims related to the September 11 catastrophe,” says Patrick Finnegan, a senior vice president with Moody’s in New York.

Instead, Finnegan anticipates that consolidation and strategic relationships among companies will remain the industry’s principal ratings drivers in the years ahead. “We expect to see an increase in merger and acquisition activity in 2002, as slower revenue and earnings growth dampens the equity valuations of many small and mid-sized companies, making them more attractive takeover targets,” Finnegan says.

Demographic trends are driving many important changes now affecting the life insurance market, Moody’s says. Financial planning for the Baby Boomers is prompting insurers to offer a greater variety of products than ever before. This is spurring the rapidly growing sales of wealth accumulation products.

However, Moody’s believes that burgeoning sales of wealth accumulation products has also increased insurers’ franchise risks. “We believe that the surge in wealth accumulation products has increased competition among life insurers and between insurers and other financial services players,” says Robert Riegel, Moody’s managing director for life and health insurance. “This heightened competitive pressure will be a major driver of U.S. life insurers’ credit quality in the years ahead.”

In Moody’s view, scale will play a greater role in life insurers’ operations in the coming years, particularly in the area of product distribution where the competitive battles are being fought most intensely. Captive career sales forces will continue to remain valuable, but will be augmented by other distribution channels such as banks, securities brokers and direct methods like the Internet.