* Warns of writedowns on excessive rate assumptions
(Reuters) - Moody's cut its outlook on the life insurance industry to "negative" from "stable" on Friday, warning that years of low interest rates will erode earnings and force insurers into increasingly large writedowns.
Because life insurers have such long-lived obligations, they rely on achieving substantial long-term returns in their investment portfolios to fund those obligations.
But with 10-year Treasury rates persistently below 2 percent, and the Federal Reserve promising to keep rates low for at least another three years, Moody's warned that insurers face a new and uncomfortable reality.
"We believe that low rates, along with below-trend economic growth and prolonged volatility in the equity markets, will continue to erode insurers' earnings and revenues, gradually weakening their financial flexibility," Moody's Vice President Laura Bazer said in a statement.
Besides the earnings squeeze, Moody's cautioned that writedowns will become "larger and more frequent" as insurers are forced to acknowledge that their assumptions about rates of return have become unrealistic.
The weak economy will also hurt sales, the credit ratings agency said, further compounding the problem.