Falling fixed-income values seen hurting insurers, survey finds

The declining value of fixed-income portfolios in a climate of rising interest rates will hinder life insurers' performance over the next two years. That was the prediction of 70% of the 27 insurance company chief financial officers surveyed by Towers Perrin in “ALM and Hedging in Light of the Economic Crisis,” a web survey released last week that was conducted in May and June. Eighty percent of the finance officers said that carriers' surplus and capital would be most affected by the economic climate, while 76% said the same of their company's balance sheet. As a result, finance chiefs said, they were acting defensively by paying closer attention to their risky asset classes and keeping more cash; 59% of those surveyed said that they were taking both of these actions. The biggest risks to carriers' asset/liability management were credit spread risk and interest rate risk, 67% of the respondents said. Fully 76% of the CFOs said that they expected Treasury rates to rise “moderately” by yearend, while 57% expected credit spreads to fall “moderately” by then. Although the CFOs were more aware of the threats that credit spreads and interest rates can pose to their companies, just 11% said that they used credit swaps to contend with risk, while 28% used interest rate hedging. All the CFOs surveyed said that their hedging programs focused on equity risk, while 60% focused on volatility risk. Interest rate and credit risks were the focal points for 53% and 13% of the executives' hedging programs, respectively. Stamford, Conn.-based Towers Perrin found that the techniques that insurers use to manage credit spread and interest rate risks haven't changed much over the past 20 years. Sixty percent of the polled executives said that they encountered basis risk in their hedging programs during the economic crisis, while another 47% said that market illiquidity was an issue that they had run into during the crisis. E-mail Darla Mercado at [email protected].