Rising interest rates positive for U.S. life insurers

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.”