Insurors are the latest group to experience a downgrade in credit quality by multiple ratings agencies, led by Moody’s Investors Service in London on Thursday, September 13.
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The group was already suffering from the low interest rate focus of the Federal Reserve and another blow was handed to it as the Fed announced a third quantitative easing (QE3) after its meeting last week.
The low interest rates have significantly impacted profits from the huge portion of fixed-income investments held by the industry. Low rates on annuities have made those investments less attractive for investors. Many have flocked to higher yielding junk bonds, emerging markets bonds, and alternative investments.
Moody’s is projecting the industry will have difficulty for the next three years as it is forced to adjust their interest rate assumptions, especially in light of the Fed’s extension of its intention to keep rates low from 2014 to 2015.
Additional reserve requirements are also making things more difficult for insurors.
Regulators are becoming concerned that companies do not have sufficient reserves to make good on their no-lapse policy guarantees.
Increasing write-downs on earnings by insurors are likely to spread. The economy will also add to insurors woes as investors decide that paying the fees on insurance products
is not feasible in light of returns.
Efforts insurors make to enhance product attractiveness may make products more appealing. A rise in inflation may also make interest rates rise sooner than anticipated.