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The Actuary The magazine of the Institute & Faculty of Actuaries

Low interest rates ‘putting pressure on US life insurers’

‘Painfully low’ interest rates could continue to make it hard for US life insurers to improve their earnings and service their debts over the next two years, Fitch Ratings said on Friday.

Interest rates economy United States
The US Federal Reserve has indicated it will keep interest rates low until at least 2014 Photo: Shutterstock

In a note, the ratings agency explained that the pressure of low interest rates had already been ‘widely reflected’ in insurers’ second quarter earnings results.

‘Low interest rates were clearly a major drag on insurer earnings both in the first and second quarters this year as they translated to a reduction in net investment income and interest margins on spread-based products that incorporate minimum rate guarantees,’ it said.

‘Bottom-most interest rates have also made it more expensive to hedge, and they continue to increase employee pension liabilities and reserve requirements for a number of products due to reduced expectations for investment returns and future profitability.’

The Federal Reserve indicated earlier this year that it will not bump up interest rates until at least 2014 and Fitch said that if interest rates were kept low for even longer it could also impact on insurers’ statutory capital – the amount of capital they are legally required to hold to operate.

‘Concern over statutory capital impacts over the intermediate term primarily relate to the potential for strengthening of statutory reserves on spread-based products,’ it said.

‘These are subject to asset adequacy testing and increased statutory reserving on guaranteed benefits that are incorporated in variable annuity and some life insurance products as well as other long-duration products like long-term care and disability income insurance.’

In light of the pressure on the income insurers are receiving from their investments, Fitch said it was concerned about the strategies they might use to seek additional yield from their assets.

These could make them vulnerable to credit losses and mismatches between their assets and liabilities, it explained, adding: ‘That said, we note the industry’s exposure to riskier assets has not changed in any meaningful way over the past year.’