Insurance Companies Are Investing In Riskier Assets To Offset Losses From Low Interest Rates

Thursday, August 30, 2012 08:15
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Insurance Companies Are Investing In Riskier Assets To Offset Losses From Low Interest Rates

Tags: annuities | interest rates | risk

Investors have been seeking higher yielding investments in droves despite the likelihood that they are taking on more risk in the process. Now, insurance companies are following suit in a departure from their usual investment in corporate bonds.

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Lower interest rates have been affecting profits at the companies who are seeing risk-based capital ratios fall because of the decline in equities markets and continually low interest rates.
 
To offset these losses, insurors are lengthening the duration of their portfolios and investing in higher-yielding asset classes.
 
Private placements, commercial mortgage loans, high-yield bank loans, and high-yield bonds are new inclusions in insurance company portfolios. This introduces higher risk innately in the structure of these instruments as well as increasing risk with longer durations.
 
Low interest rates have also hurt sales of insurance products. In such an environment, it’s more difficult to offer attractive fixed income annuity products with guaranteed growth rates or attractive caps for indexed annuities.
 
If interest rates maintain current levels, insurance company earnings will fall into the single-digits this year.

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