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Announcement:

Moody's: US Life Insurers Would Be at Risk in Prolonged Low Interest Rate Environment

19 Aug 2011

New York, August 19, 2011 -- Moody's Investors Service today published a stress scenario analysis demonstrating that a protracted period of low interest rates would subject US life insurers to substantial losses and could result in rating downgrades. The rating agency's baseline economic scenario for the United States calls for a sluggish recovery, however, under which slowly increasing interest rates would gradually relieve the spread compression and earnings pressure insurers are currently experiencing.

The new report describes Moody's review of US life insurers' 2008--10 regulatory cash flow testing filings. "As expected, our analysis showed that insurers fared badly under declining interest rate scenarios," says Vice President Neil Strauss. "Low interest rates over five or more years would lead not only to significantly lower investment income, but also to higher reserve requirements, weakening firms' profitability, capital adequacy and financial flexibility."

"With the vast majority of total industry general account reserves related to annuities and other interest-sensitive products, US life insurers have a considerable amount of interest rate risk," Strauss says. "And a significant portion of their earnings derive from interest spread." But because the crediting rates paid to policyholders cannot be lowered below guaranteed minimums, the profits companies earn from interest spread are compressed when interest rates are low. Moreover, at some point investment yields may fall below crediting rates, producing negative interest spread, which hurts earnings significantly.

Currently, the 10-year US Treasury bond hovers just above 2%, which is extremely low on a historical basis and down significantly from 3.3% at year-end 2010. Life insurers' portfolios have on average been yielding between 5% and 6% for the past three years, generally heading downwards as interest rates have declined. "Under our stress scenario, in about five years the 10-year US Treasury rate would be about 1.5% and the portfolio yield for insurers would fall below 4.5%," Strauss says. "And investment income would decline to a point where insurers may be unable to both fund promised policy benefits and meet their profit margins."

While life insurers are not expected to incur significant losses in the near term, if interest rates were to remain at historical lows, most affected would be firms with sizable exposure to fixed-rate annuities, universal life policies with high crediting rates, variable annuities with lifetime guaranteed income benefits, and long-term care and disability.

Few insurers have bought protection against prolonged low interest rates, Strauss says. Exceptions are the minority of companies that have bought interest rate floors, and insurers with interest rate hedging programs for variable annuity lifetime income guarantees or that have locked in rates on the investment of future premiums.

The report is titled "Protracted Low Interest Rates Would Present Major Risk for US Life Insurers" and is available on moodys.com.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

New York
Neil Strauss
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
MD - Insurance
Financial Institutions Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: US Life Insurers Would Be at Risk in Prolonged Low Interest Rate Environment
No Related Data.
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