Rising interest rates lift insurers’ profitability

A trend to a gradual rise in global interest rates which may be starting to take hold is credit positive for the profitability of insurers, Moody’s said in a research note.

In its latest move, the US Federal Reserve has raised interest rates Sept. 26 as it forecast that the US economy would enjoy at least three more years of growth, according to a Reuters report. In a statement that marked the end of the era of “accommodative” monetary policy, Fed policymakers lifted the benchmark overnight lending rate by a quarter of a percentage point to a range of 2.00 percent to 2.25 percent. The US central bank still foresees another rate hike in December, three more next year, and one increase in 2020, according to Reuters.

Solid, if slowing, economic growth in key advanced markets for 2018 and 2019, together with monetary policy tightening, support a trend toward gradually rising global interest rates over the next several years in key markets (US, UK, Europe), with potential knock-on effects in certain emerging markets, Moody’s noted.

As a result, increasing asset yields are set to boost life and property-casualty (P&C) carriers’ investment income and widen spread-based product earnings, the rating agency said.

US interest rates have risen sooner and further than in other global economies, with the negative gap between new investment yields and US life insurers’ average portfolio yields narrowing substantially, and certain investment categories forecast to turn positive in early 2019, Moody’s noted.

“This means investment yields and income will rise, and pressures will continue to lift on legacy blocks of interest-sensitive life insurance, fixed and variable annuity (VA) products, and long-term care (LTC),” the agency said.

“Where monetary tightening is proceeding more slowly (for example, in Europe) or may not begin for some time (Japan), interest rates and investment returns will remain below historical levels, depressing investment profits. However, in many markets, the earnings impact is mitigated by insurers’ defensive strategies to deal with still-low interest rates, including their shift to interest-insensitive fee-based products and businesses, and a focus on high-morbidity/mortality-margin products,” Moody’s said.

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