Insight: Fed's new rate policy twists insurers into a knot

Wed Sep 21, 2011 3:09pm EDT
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By Ben Berkowitz

NEW YORK (Reuters) - The Federal Reserve's latest move to stimulate credit for consumers and businesses, known as Operation Twist, is likely to threaten the earnings of some of the country's largest insurers for years to come.

Wall Street in the past week has dimmed its view of MetLife, Prudential Financial and other big insurers, forecasting that they will have to cope with low rates and weak market returns through the end of 2011 and possibly well beyond.

The problem is that returns on insurers' investment portfolios can't keep pace with the obligations they have accumulated from torrid sales of annuities and life policies over the past few years.

"Ultimately I think it's going to be a challenge to business models," said Gregory Staples, co-head of U.S. fixed income portfolio management at Deutsche Insurance Asset Management, the world's largest asset manager for insurers.

Insurers were demonstrating sound financial management in purchasing long-term bonds with the premiums they collected to balance their long-term obligations. But if the Fed's Operation Twist is successfully executed it will push long-term rates lower and, according to some experts, force insurers to retrench on product sales.

No one is suggesting Twist will put insurers out of business, but it is exacerbating a problem that they have been contending with since the financial crisis of 2008.

Under Operation Twist, as announced Wednesday, the Federal Reserve sell shorter-term notes to buy longer-dates Treasuries. That will have the effect of keeping longer-term interest rates down, which the Fed hopes will spur consumers to borrow and spend.

"Folks have brought the low interest-rate environment up to No. 1 priority," said Doug French, managing principal of the insurance and actuarial advisory practice at Ernst & Young. "We're not going to get any relief from interest rates for the next two to three years."   Continued...