Moody's Investors Service today published a stress scenario analysis that demonstrates the effects of a protracted period of low interest rates on U.S. life insurers. According to the report, this situation could subject US life insurers to substantial losses and resultant rating downgrades. The rating agency's baseline economic scenario for the United States calls for a sluggish recovery, however, under which slowly increasing interest rates would gradually relieve the spread compression and earnings pressure insurers are currently experiencing.

Moody’s latest report offers a review of U.S. life insurers' 2008--2010 regulatory cash flow testing filings. "As expected, our analysis showed that insurers fared badly under declining interest rate scenarios," said VP Neil Strauss in a statement. "Low interest rates over five or more years would lead not only to significantly lower investment income, but also to higher reserve requirements, weakening firms' profitability, capital adequacy and financial flexibility."

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