WASHINGTON —The protracted low interest rate environment continues to wreak havoc with the earnings of U.S. publicly traded life insurers, with pretax operating income declining 19 percent for insurers tracked by Fitch Ratings Service in the first half of the year.
Fitch Ratings has just released its “ U.S. Life Insurance GAAP Results Dashboard (Midyear 2016)” report.
“Unfavorable mortality and competitive pricing continue to hurt individual and group life insurance segments,” Fitch Ratings Director Dafina Dunmore said in response to the report.
At the same time, volatile financial markets impacted the variable annuity, retirement plan and asset management segments, she said.
The low interest rate environment hampered investment income and asset-based fee income for publicly traded U.S. life insurers, the report said.
Average aggregate operating return on equity declined to 10.4 percent in the first-half of 2016 compared with 13 percent in the prior-year period for Fitch’s rated universe, the analysts said. More ominously, Fitch Rating analysts said they believe the likelihood of interest rates remaining low for longer was enhanced by the United Kingdom vote to withdraw from the European Union.
That vote led to a “material decline in interest rates in second-quarter 2016,” the analysts noted.
Specifically, investment income declined 3 percent in the first-half of 2016 compared with the prior year. That was driven by low reinvestment rates and reduced alternative investment income.
At the same time, hedging activity and the impact of new business provides a partial offset to low rates.
Fitch Ratings analysts said they expect low reinvestment rates to continue to be an earnings headwind going into the second half of 2016. The analysts noted that realized investment gains for life insurers mainly reflect hedging activity, with investment gains during the period largely driven by derivative-related items.
The report indicated that credit-related impairments increased but remain modest relative to historical averages and pricing assumptions. These losses most likely involved investments by insurers in the energy sector.
As for products, while fixed annuities faced continued interest margin compression, fixed indexed annuities somewhat offset the impact, the analysts said.
Individual life results, however, continue to be adversely affected by unfavorable mortality, low interest rates and competitive new business pricing, Fitch analysts said.
Group insurance also faces headwinds, including continued competitive pricing and unfavorable mortality, the analysts said. At the same time, long-term care results are still being hurt by low interest rates and related reserve charges.
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