U.S. property/casualty insurers vulnerable to rising interest rates

NEW YORK—U.S.-based property/casualty insurers are vulnerable to rising interest rates, according to a report released Thursday by New York-based Moody's Investors Service Inc.

The report, “U.S. P&C Insurers Face Heightened Interest Rate Risk,” notes that with two-thirds of the industry's $1.3 trillion in invested assets allocated to fixed-income securities, the industry is acutely sensitive to rising interest rates. In its central economic scenario, Moody’s projects interest rates rising roughly 100 to 150 basis points over the next year and by as much as 300 basis points over the next two years.

"Interest rate increases could result in a capital loss of between $40 billion and $60 billion on the industry's $874 billion bond portfolio in 2012, or 7% to 11% of its equity capital base," said Paul Bauer, Moody's vp and author of the report.

According to the report, one indication that insurers are accounting for the prospect of higher rates is that average bond portfolio durations, which have remained relatively steady during the past five years, have drifted down modestly since year-end 2010. "We believe companies have generally chosen to keep portfolio duration on the short side as a result of low interest rates and expected future rate increases, as well as an inability to generate significant additional returns by extending maturities out on the yield curve," Mr. Bauer said.