Life insurers will be hurt by falling values of fixed-income securities, CFOs say in survey

Values on fixed-income securities will fall, hindering life insurers' financial performance over the next two years. That was the prediction of 70% of the 27 chief financial officers surveyed in a Towers Perrin poll noted that sagging values of fixed-income securities will hurt their financial results over the next year or two, according to the study “ALM [asset/liability management] and Hedging in Light of the Economic Crisis.” The web survey, released today, was conducted in May and June. Eighty percent of the finance officers said that they think 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 that 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 are 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. Another 28% said that they used interest rate hedging to combat rate spikes and dips. All the CFOs surveyed said that their hedging programs focus 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. Interestingly, two-third of the surveyed executives indicated that they are satisfied with their hedging programs, while just 6% said they are “somewhat dissatisfied.”