The recent rise in interest rates is credit-positive for U.S. insurers, Moody’s Investors Service concludes in a new report.
In a July 15 “Special Comment,” the New York-based credit rating agency cites an 85 basis-point rise in the yield of 10-year U.S. Treasury bonds—to about 2.6 percent on July 11 from less than two percent in late April—as “positive” for U.S. life insurers.
“If this trend continues for a few quarters, combined with an improving economy, a revised sector outlook to stable from negative may be warranted,” the report states. “The low interest rate and weak macroeconomic environment are major contributors to our outlook change for the U.S. life sector to negative from stable in September 2012.
“Reinvestment risk, which has been stressed in the low rate environment, would be reduced,” the report adds. “Companies would be able to progressively increase their profit margins as both new money rates and portfolio yields would rise.”
The Moody’s report also notes that a slow rise in the U.S. Treasury yields will reduce pressure stemming from crediting rate guarantees. The rise would also lessen “disintermediation”—a decline in the use of financial institutions as intermediaries in the borrowing and investing of money—given that the attraction of new policies relative to in-force policies would be “muted.”
“Therefore, although the market value of insurers’ fixed income holdings would decrease due to the rise in rates, likely leading to unrealized capital losses, insurers would not need to crystallize losses to meet heightened redemptions,” the report states. “Although there would be negative impacts on shareholders’ equity due to unrealized losses on the insurers’ bond portfolios, we believe the economic impact would be modest given that the companies have the ability and intent to hold the underwater securities either to maturity or recovery.”
Rising interest rates, the report observes, would also likely improve stock prices of annuity writers.
“These [stock prices] have been below book value for most life insurers for several years and have been a factor contributing to some large goodwill charges by insurers,” the report notes. “Potential valuation recovery would also attract investors and capital on more attractive terms for the insurers.”