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.
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.
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