CHICAGO & LONDON--(BUSINESS WIRE)-- Fitch Ratings believes the Federal Reserve's decision to extend Operation Twist until at least the end of the year will add to the pressure on U.S. life insurers' margins and could further reduce statutory capital levels through increased reserving.
The Fed's extension of the program is intended to keep long-term interest rates down by selling short-term bond holdings and buying longer term securities. This limits the return insurance companies can generate on their investments. However, minimum rate guarantees incorporated in policyholder accounts also limit the ability of life insurers to pass on lower returns to policyholders and will keep pressure on firms' interest margins and earnings.
Along with reduced interest margins, near-term impacts from low interest rates include reduced statutory capital levels, driven by increased statutory reserving associated with the use of lower statutory valuation rates and the impact of asset adequacy testing. To a lesser degree, lower rates could affect funding requirements for pension liabilities for a select group of life insurance companies.
In the longer term, we are concerned about the strategies life insurers may be using to reach additional yield in the current low interest rate environment, which could make them vulnerable to a credit downturn, disintermediation, and asset liability mismatches in a rapidly rising interest rate environment. To date, we have not seen insurers redeploying investments into below-investment-grade fixed-income securities in search of yield.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Simon Kennedy, +44 20 3530 1387
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Andrew Davidson, CFA, +1-312-368-3144
Brian Bertsch, +1-212-908-0549
Source: Fitch Ratings