Canadian Underwriter

U.S. Federal Reserve interest rate increase unlikely to provide much short-term relief for insurers: A.M. Best

December 14, 2016   by Canadian Underwriter

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The U.S. Federal Reserve’s decision to raise short-term interest rates by 25 basis points is unlikely to provide much relief for insurers, ratings firm A.M. Best Company said on Wednesday.

Interest ratesThat day, the Federal Reserve raised its benchmark rate by a modest quarter-point to a still-low range of 0.5% to 0.75%, the Associated Press reported. The Fed raised the key interest rate in response to a solid economy in the United States and expectations of higher inflation, the Associated Press said, adding that it foresees three rate hikes in 2017.

“A.M. Best doesn’t anticipate that the move will provide much relief for insurers from the sustained low reinvestment rates they have been faced with over the past few years,” said Ken Johnson, a senior director in A.M. Best’s Life/Health Ratings Division. “In addition, this measured increase has been priced into the yield curve for some time, and the previous December 2015 increase had little to no impact on the long end of the Treasury yield curve.”

However, Johnson continued, A.M. Best does anticipate some eventual relief on the longer end of the curve – 10 years and out – “as inflation starts to play a bigger role in the economy and the Fed finally stops reinvesting the maturing portion of its Treasury and mortgage-backed securities holdings; however, the timing of this impact remains unknown.”

Life insurers in particular, with concentrations in investment grade fixed-income securities around the 10-year maturity bucket, would benefit from higher rates as they have not experienced 10-year Treasuries over 3% since the end of 2013, Johnson said.

The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis, the Associated Press said, adding that the move – only the second rate hike in the past decade – came on a unanimous 10-0 vote. It also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of stronger growth and a drop in the unemployment rate for November to a nine-year low of 4.6 per cent.