Moody’s warns of interest rate risk for American insurers

An upward surge in interest rates could spell trouble for U.S. property and casualty insurer investments, Moody’s rating agency said in a recent report.

Insurers are facing increased interest rate risk due to their large fixed income holdings, which account for about two-thirds of the industry’s $1.3 trillion in invested assets, according to the report US P&C Insurers Face Heightened Interest Rate Risk.

Moody’s estimates insurers could face unrealized and realized capital losses of between $40 billion and $60 billion on the industry’s $847-billion bond portfolio in 2012, as well as a similar capital loss in 2013 if interest rates increase roughly from 100 to 150 basis points.

The insurance industry’s fixed income allocation “has served insurers well in recent years, as their bond valuations have benefited both from a flight-to-quality and from declining interest rates,” Moody’s said in the report. “However. . . at some point we expect this trend to change, and given recent rate increases this change may already be taking place.”