The U.S. Federal Reserve Board’s reluctance to raise interest rates may mean that U.S. life insurers will have to take accounting charges in the third quarter, says Fitch Ratings Inc. in a research note.
In particular, U.S. life insurers “will be under increased pressure to rationalize long-term rate assumptions used to establish reserves” given the Fed’s recent decision to stand pat on rates, and the market’s revised expectations for low rates, Fitch’s note. “We see a heightening risk that life insurers could take charges in third quarter 2015 due to rate expectations.”
The New York-based credit-rating agency notes that low interest rates mean lower average investment yields for fixed-income investments, which pressure life insurers’ earnings and reserve projections.
“With last week’s Fed decision reinforcing expectations for a very prolonged return to higher interest rates, the probability dimmed for near-term low rate relief,” Fitch’s note says.
Life insurers typically review the assumptions underlying their policy reserves in the third quarter, Fitch says, and as a result, “We believe that the Fed’s position increases the likelihood that life insurers will take [generally accepted accounting principal] charges in third quarter 2015 tied to a revision in long-term [interest] rate assumptions.”
Potential charges are expected to be “very manageable,” given life insurers’ earnings and capital positions, the Fitch note says. Therefore, credit ratings are not likely to be affected in the near term.