NEW YORK (AP) – Record-low interest rates and choppy stock markets could spell trouble for the life insurance industry, according to the rating agency Moody’s.
In a report released Friday, analysts at Moody’s warned that profits for life insurers could sag over the next 12 to 18 months and lowered their outlook on the industry to “negative” from “stable.” The main problem for insurers is interest rates, which are at historically low levels, said Laura Bazer, a senior credit officer at Moody’s. The ratings firm expects long-term interest rates to remain in the low single digits for the next few years.
“We believe that low rates, along with below-trend economic growth and prolonged volatility in the equity markets, will continue to erode insurers’ earnings and revenues, gradually weakening their financial flexibility,” Bazer said.
Long-term interest rates have hit all-time lows this year as big investors from around the world have shifted mone y into the U.S. government bond market. The surge in demand has driven bond yields down. The 10-year Treasury note, a benchmark for a wide variety of loans, was trading at a yield of 1.87 percent late Friday. Two years ago, the 10-year yield traded closer to 3 percent, then considered a historically low rate.
Lower long-term rates make it cheaper for governments, companies and house buyers to borrow. But large bond buyers like life insurance companies play the role of lenders. For them, a drop in yields means a drop in returns.
Moody’s said some insurers may have to take write-downs when the returns they had banked on fail to materialize. Volatile stock markets will also make some insurance products more difficult to manage.
High unemployment and possible tax increases could also cut consumers’ demand for life insurance, Moody’s said.