Rock-bottom interest rates could erode insurers’ earnings power and financial strength for years to come, putting an end to a string of stronger-than-expected rises in dividends, analysts said in reports published on Thursday.
Credit rating agency Moody’s said it expected interest rates to remain at a low level, cutting the return that insurers earn from investing in new bonds as they replace their stock of maturing, higher-yielding debt.
“Insurers’ investment returns will continue to fall for many years in most of the world’s economies,” Moody’s said.
“This will hurt insurers’ profits and increases the risk of losses and capital declines for life insurers offering guaranteed rates,” it said in a report published on Thursday.
Moody’s said life insurers in Germany, the Netherlands, Norway and Taiwan were the most exposed to interest rate risk, while those in Australia, Brazil, Ireland, Mexico and Britain were the least exposed, though not all insurers in each country faced the same level of risk.
Many German insurers offered, for instance, guaranteed annual interest rates of up to 4 percent on insurance savings policies, which is far higher than the current yield of just 0.2 percent on 10-year benchmark government bonds.
German insurance trade body GDV said the low interest rates environment was a challenge for the sector.
“However, insurers are capable of bridging the low interest rate phase and that is also the view of regulators and rating agencies,” it added.
COMPETITION
Investors have been piling into insurance stocks on the expectation of higher dividends and share buybacks from insurers that are not able to put that cash to work in the business, where premiums are pressured by stiff competition.
But Deutsche Bank said low bond yields were clearly affecting insurers’ financial solvency and earnings estimates.
“This does have implications for whether the sector’s ‘safe-haven’ status is still deserved,” Deutsche Bank’s analysts said in a note downgrading the European insurance sector to “neutral” from “overweight.”
“We think it does now choke off the potential for any new positive surprise on dividends or capital return and leaves insurers’ share prices more vulnerable to any setback,” they said.
They also downgraded their recommendations on Europe’s largest insurer Allianz as well as Dutch insurer Aegon to “hold” from “buy,” saying they could not find near-term catalysts for the stocks.
Credit Suisse analysts earlier this week maintained their “neutral” rating on Italian insurer Generali, pending more evidence its solvency capital was in line with peers.
“Until the capital is clarified, we expect the market to remain cautious in giving credit for higher dividends,” they said. (Editing by Pravin Char)
Topics Carriers Profit Loss Germany
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