Low interest rates to persist in 2013

Photo credit: <a href="http://www.freedigitalphotos.net/images/view_photog.php?photogid=2664">Stuart Miles</a> Photo credit: Stuart Miles

Low U.S. interest rates in 2013 will continue to depress life insurers’ investment yields, according to a new forecast.

FitchRatings, New York, published this forecast in a new report, “2013 Outlook: U.S. Life Insurance.” The company states in the report that its interest rates forecast is based on “recent guidance” from the Federal Reserve.

“The ongoing supply/demand imbalance in core fixed-income markets is expected to continue for a period of time, which may drive further spread-tightening in 2013,” the report states.

“For life insurers, Fitch expects persistent low interest rates to pressure portfolio investment yields and slow earnings growth over the near-term and will lead to more frequent impairments associated with goodwill, deferred acquisition cost-unlocking, and other GAAP loss recognition associated with changes in long-term reserve assumptions,” the report adds.

The report goes on to note that the low interest rate environment is limiting life insurers’ capacity to adjust crediting rates on interest-sensitive business. In-force business is currently at or near minimum guarantees.

In addition to pressuring interest margins, Fitch expects low interest rates to “lead to increased statutory reserving” connected with asset adequacy testing and potential deferred tax asset impairments.

“Longer term, Fitch is concerned about the strategies that life insurers may be using to reach for additional yield in the current low interest rate environment, which could make them vulnerable to disintermediation”— a reduction in the use of banks and savings institutions as intermediaries in the borrowing and investment of money— “and asset liability mismatches in a rapidly rising interest rate environment,” the report states.

“To date, Fitch has seen insurers increase their investment in less liquid asset classes, including commercial mortgage loans, private fixed income and alternative investments in search of yield,” the report adds. “Fitch has not seen insurers redeploying investments into lower-rated fixed income securities in search of yield.”

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