Insurers pessimistic over interest rate changes: A.M. Best report

Insurers have become increasingly pessimistic about the possibility of a material change in interest rates this year, suggested a study published Thursday by ratings firm A.M. Best Company Inc.

The special report, titled A.M. Best Winter 2014 – 2015 Insurance Industry Survey, revealed that 67% of respondents believe that interest rates will remain below 2.25% by the end of 2015, compared with 11% of respondents who shared the same sentiment during the summer survey. Nearly half (49%) of property and casualty companies that responded felt as though rates would finish the year below 2%.

Other highlights from the results of A.M. Best’s third quarterly survey include:

• Emerging market exposure is gaining more importance in well-diversified portfolios given its growing role in the global economy, with this segment expected to eclipse 50% of global GDP before 2020;

• Insurers remain interested in fixed-income or equity-type exposures such as private equity and hedge funds, as opposed to more “real” asset exposures like real estate or infrastructure; and

• While total bond investments remained relatively stable for the life/annuity sector, the bond portfolio composition has changed with more direct movement into NAIC 2 rated holdings in an effort to gain yield without heading too far down the credit spectrum.

“Asset allocation, competition, capital management and ERM (enterprise risk management) remain the focus of insurance executives,” A.M. Best said. “Although none of these topics are new areas of emphasis, A.M. Best’s 2014 – 2015 winter survey results shed some new light on how companies are thinking about these issues – with sometimes surprising results.”

Other questions covered the changing landscape of competition due to the entrance of non-traditional players. A.M. Best also elicited responses about capital management and the potential deployment of that capital, and in particular, into growth through acquisitions.