Active management of crediting rates on spread-based business, improved fee income driven by growth in assets, ongoing expense management, favorable investment results and selected acquisitions are all driving modest earnings improvement in 2012 for U.S. life insurers, according to Fitch Ratings.

Average adjusted operating return on assets for a sample group of companies improved to 0.97% in 2012 from 0.88% last year. The improvement is based on annualized first quarter results, which benefited in part from a 12-percent increase in the S&P 500 index. Given the second-quarter decline in the equity markets and no let up in the other pressures, Fitch anticipates a more modest improvement in full-year results than first-quarter results would indicate.

While the rating agency anticipates modest improvement in industry profitability for the full year 2012, it recognizes uncertainties associated with the challenging macroeconomic environment. As interest rates remain at historically low levels, possibly continuing at least through 2014, and flexibility to further reduce crediting rates will be more limited in a sustained low-rate environment, Fitch believes insurers face an uphill battle in materially improving returns and earnings-based interest coverage metrics in 2012.

These challenges combined with the Eurozone debt crisis contagion risk and the slow economic recovery have caused several companies to exit or pull back from fixed and variable annuities, universal life with no lapse guarantees, and other interest-sensitive lines of business. And, long-term care is not expected to grow, as life insurers exit this market for new business and struggle with underperforming legacy blocks of business.

The primary segments driving results for U.S. life insurers are individual life and annuities, group life and annuities, and individual and group disability income insurance, Fitch says. Also on a positive note, realized credit-related investment losses continue at reduced levels, and commercial mortgages are generally performing well.