Moody’s Investor Service (Moody’s) outlook for life insurers in 2013 is negative due to the continuous low interest rate environment and anemic economic growth.
Interest rates — both in the U.S. and around the world — will remain historically low for near future. Life insurers have, for the most part, been able to insulate themselves from the immediate adverse effects of the low interest rate environment because their investment portfolios turn over slowly and their management teams have taken action in the form of lowering crediting rates which have helped maintain interest margins.
Moody’s warns that these precautionary and self-preserving actions are short-lived and by the middle of the decade, earnings will increasingly become lower due to the low interest rate environment. The decline of investment return will begin to impact guaranteed contractual minimums and the ability of any of given insurer to lower its credit ratings and pass along the decreasing rates with their policyholders will evaporate.
Few life insurers have been able to properly hedge against the low interest rate environment because the hedging itself is rather expensive. Moody’s expects that those who have been able to afford will continue to do so and those who have been able to will realize adverse earnings.
In response to lowered earnings, many life insurers will chase higher investment yields by increasing asset and credit risk, which Moody’s views as a credit negative.