June 12 (Bloomberg) -- U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., face pressures from low interest rates that could lead them to take on more investment risk, the U.S. Treasury Department said.
“Insurers may be tempted to ‘reach for yield’ by investing in higher-yielding, but riskier, assets,” the Treasury’s Federal Insurance Office said today in its first report. “A sustained low-interest-rate environment may lead insurers to offer products for which risk management becomes more tenuous.”
The FIO was created by the Dodd-Frank law, and advises Treasury on insurance-industry issues to help prevent a repeat of the 2008 financial crisis. The Financial Stability Oversight Council, also created by Dodd-Frank as part of Treasury, designated systemically important non-banks this month.
American International Group Inc., which repaid a U.S. bailout last year, and Newark, New Jersey-based Prudential were named as systemically important. MetLife has said it may be tagged with that designation after a review.
U.S. insurers are among the largest purchasers of corporate, municipal and sovereign bonds, the FIO said in the report. Companies invest premiums from clients to back future payouts and generate profit.
To cushion the effects of low rates, insurers may raise prices or change product terms, FIO said. The companies may also use hedges that guard against depressed yields.
The 10-year Treasury yields 2.22 percent, compared with an average payout of 3.57 percent over the past decade. The bond paid as little as 1.39 percent in July. The yield jumped 0.46 percentage point in May, the biggest monthly increase since December 2010.
A “sudden, significant” interest-rate increase could lead to declines in insurer portfolios and push policyholders to give up some contracts, harming the firms, FIO said.
The FIO report lists issues facing insurers, including increased losses from natural disasters, an aging U.S. population and growth opportunities in emerging markets. The office is mandated by Dodd-Frank to issue an annual report on the industry.
Insurers in the U.S. are primarily regulated by state watchdogs. FIO has the power to advise the government on weaknesses in the state regulatory system, said Howard Mills, chief adviser of Deloitte LLP’s insurance-industry group.
“I don’t think this report does anything to bring greater clarity to the regulatory landscape,” said Mills, who is a former New York State insurance regulator. “It’s a tough environment for the insurance industry and this did nothing to really clarify where we might be going.”
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