50% Off! Beat the market in 2025 with InvestingProCLAIM SALE

Rising rates put pressure on U.S. insurers' reserves, Fitch says

Published 04/03/2023, 05:32 PM
Updated 04/03/2023, 05:35 PM
© Reuters. FILE PHOTO: U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/Illustration

NEW YORK (Reuters) - Rising interest rates are eating into the reserves that U.S. life insurers must hold to deal with rate fluctuations, ratings agency Fitch Ratings said on Monday, creating an accounting issue that could impact insurers' income.

Interest maintenance reserves (IMRs) smooth insurers' balance sheets by showing interest-related capital gains and losses on fixed-income assets, and amortizing those gains and losses into income over the remaining life of the investments sold.

The accounting standard meant that insurers seeking to take advantage of rising interest rates last year ended up recording losses in their IMRs on bonds with lower yields that they sold before maturity to make way for new, higher yielding bonds.

IMR balances, in aggregate, slumped 57% in 2022 from a year earlier to $12.5 billion, while the number of insurance firms with negative balances grew to 23% from 8% in 2021, Fitch said.

IMR balances are expected to continue declining this year, Fitch said.

"Life insurers' strong liquidity position and cash-flow matching strategies should mitigate the effect of continued realized losses in the near term," said Jack Rosen, a director at Fitch.

© Reuters. FILE PHOTO: U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/Illustration

Negative IMR balances are currently restricted from being admitted as assets under statutory accounting rules, creating a drag on insurance firms' capital and surplus, but some insurers have received permission from their respective state regulators to admit the negative balances, Fitch said.

The National Association of Insurance Commissioners, which is governed by the chief insurance regulators from all 50 states and sets standards best practices for the insurance industry, is looking into long-term solutions on how statutory accounting treats negative IMR, Fitch said.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.