[August 10, 2012]

Fitch: Low Interest Rates Weighing Down U.S. Life Insurers

Fitch Ratings notes that U.S. life insurers remain pressured courtesy of historically low interest rates, the impact of which was widely reflected in second-quarter earnings results. We believe the influence of painfully low rates will continue based on Federal Reserve indications that it will not bump rates up until at least 2014.

We believe the impact of sustained low interest rates will limit the ability of U.S. life insurers to materially improve earnings and debt service metrics over the next two years. This will also begin to have a meaningful impact on statutory capital should the long-term low interest rate last more than three to five years.

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. 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.

Concern over statutory capital impacts over the intermediate term primarily relate to the potential for strengthening of statutory reserves on spread-based products. These re 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.

Given the ongoing pressure on net investment income, we continue to be concerned about strategies that life insurers may be using to reach for additional yield, which could make them vulnerable to credit losses or disintermediation and asset/liability mismatches in a rapidly rising interest-rate scenario. That said, we note the industry's exposure to riskier assets has not changed in any meaningful way over the past year.

For more information, please see Fitch's special report, "Earnings Outlook Mixed for U.S. Life Insurers," published July 17 on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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