Rising interest rates could be bad news for property/casualty insurers
Reprints
Rising interest rates could mean problems for U.S. property/casualty insurers, according to a report released Thursday by Moody's Investors Service Inc.
The property/casualty insurance sector holds about $900 billion of bonds, which leaves it highly exposed to fixed income market developments, said Moody's in its special comment, “P&C Insurance Interest Rate Challenges: Capital Volatility if Rates Keep Moving Up, Lackluster Returns if Rates Stay Low.”
Moody's said that for each 100-basis-point increase in interest rates, the value of bonds held by U.S. property/casualty insurers would decline by about $40 billion, which translates into roughly 7% of the industry's capital. But a rate spike of 300 basis points in the next 12 to 18 months could mean unrealized losses of about $120 billion, or roughly 20% of policyholder surplus, Moody's said.
But insurers face risks no matter which way interest rates move, said Paul Bauer, the Moody's vice president-senior credit officer who wrote the report.
“In the current environment, P&C companies face investment risk regardless of interest rate direction,” said Mr. Bauer in a statement accompanying the report. “If rates continue moving up, which we believe is the more likely scenario, companies will face capital volatility as bond prices decline. If rates stay low, or resume their long-term downward trend, earnings will be pressured by weak investment income.”
Moody's said that continued low rates present a challenge for the property/casualty industry's profitability because of the difficulty of generating investment income in a low-yield environment.
“If yields were to return to the low levels seen in the first quarter of 2013 and remain there for several years … the industry would face a decline in its total investment income of about $3 billion annually over the next five years,” it said.
