How to Pace Perpetually Low Interest Rates

The Federal Reserve’s decision not to raise interest rates last month added insult to injury for insurers from AIG  (AIG)   to MetLife (MET) and Prudential (PRU) .

Not only were their revenue streams curbed in the three months through June, the period for which several major insurers start reporting results today, they won’t get a rate-hike boost during most of the third quarter either. The central bank’s monetary policy committee doesn’t meet again until Sept. 20.

“These companies have all had to operate in this unprecedented and really protracted low interest-rate environment,” S&P Capital analyst Cathy Seifert said in a phone interview. “Low interest rates are going to impact them both on the investment and on the underwriting perspective.”

Near-zero rates have been hindering financial performance at U.S. insurance providers , which use the return on invested premiums to fund policy payouts and buoy profit, for more than seven years. The prolonged period heightens the odds that some companies will have to boost capital reserves, which would hurt earnings and might spur credit-rating firms to downgrade them, RBC Capital Markets analyst Eric Berg wrote in a note.

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In addition to assessing second-quarter performance for fluctuations in that risk, investors and analysts will be evaluating the fallout from market volatility after Great Britain’s decision to leave the European Union and the ongoing effects of slow economic growth, with GDP expansion of 1.2% below expectations.

Still, “we do see the possibility of upward movement in the group if, as we expect, company managements affirm during the reporting season that the downward move in rates is once again a profit-and-loss issue, not one that could lead to reserve hike-driven reductions in equity capital,” Berg wrote.

Whether companies adjust their business mixes or sell some units to deal with “the trend of seemingly forever low interest rates” will be an important consideration, said S&P Global’s Seifert.

New York-based AIG, for instance, announced in January that it was shedding about a fifth of its mortgage-insurance business through a spinoff, selling the broker-dealer business for an undisclosed amount and overhauling its portfolio to create nine modular businesses, which could be sold individually if warranted. The sale of its advisory unit was completed in May.

The changes were made amid pressure from activist investors John Paulson and Carl Icahn, who wanted the company to restructure itself enough to shed the systematically important financial institution — or SIFI — label, a government designation that imposes higher capital requirements and heightened regulatory scrutiny on companies large enough to threaten the broader economy if they collapse.