OLDWICK, N.J.--(BUSINESS WIRE)--As the U.S. Federal Reserve (Fed) begins tapering its balance sheet, A.M. Best expects interest rates to tick up and bond prices to experience some modest downward pressure, according to an A.M. Best report.
The Best’s Special Report, titled, “The End of Quantitative Easing – How Will Insurers React?” notes that although no drastic moves in long-term rates are expected, there is no historical precedent as quantitative easing and the subsequent tapering has never been attempted. Material changes in long-term consumer inflation expectations, continued currency weakness or further tightening of the labor market could reshape investor expectations and drive long-term rates higher. Equity markets also bear watching as valuations could come under pressure if investors flee to safety owing to monetary or fiscal policy changes. Uncertainty surrounding future Fed leadership and other macroeconomic variables also will complicate near-term investment strategies for insurers.
The U.S. life/annuity (L/A) segment’s bond holdings topped $3.0 trillion for the first time in 2016, with $739.2 billion worth of bonds maturing by 2022. The L/A segment also has a smaller percentage of its bond portfolio maturing by 2022 compared with the property/casualty segment. Consequently, L/A insurers have less flexibility in the near- to medium-term environment. Insurers are likely to continue to adjust their maturity schedules while remaining within their asset-liability management guidelines relative to their overall liability profiles.
The Fed will begin the process of unwinding quantitative easing by allowing $10 billion of assets per month to roll off through Dec. 2018, comprising $6 billion of Treasuries and $4 billion of agency mortgage-backed securities. The amount allowed to roll off is forecast to increase steadily through 2018, reaching a final amount of $50 billion per month in Dec. 2018.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=267338.
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