if a trump presidency means higher bond yields and less regulation, it would be easy to think that is good news for insurers. like many things with insurance, however, the simple answer isn<u+2019>t often right. on regulation, the biggest win could go to the very biggest u.s. insurers<u+2014> aig , prudential financial and metlife <u+2014>which may no longer be tagged as systemically important . that could cut regulatory costs. a republican-leaning financial stability oversight council could easily decide that insurers shouldn<u+2019>t be caught by provisions meant for banks, according to some analysts. more relief could come from scrapping the labor department<u+2019>s fiduciary rule, which affects the sale of retirement products and is due to come into force in april. plenty of republicans don<u+2019>t like it , but there will be little time to introduce new legislation to repeal it unless it rises near the top of their agenda. then there is the question of rising yields. this is only good if they rise in the right way and for the right reasons. insurers will do best if yields rise steadily and if they are increasing due to good, well-balanced economic growth. the upsetting factor is if yields rise mainly due to higher inflation: that would drive up the costs of future claims even as higher interest rates reduce the present value of those liabilities. also if yields rise too quickly, that would make products with income guarantees, like various annuity products in the u.s. and europe, seem much less attractive. savers are more likely to stop paying into these products or cash them in, which would hit insurers<u+2019> expected future profits and force them to write down the investment they made to attract these customers, known as deferred acquisition costs. but even if yields rise in a nice steady way, the trouble for insurers is that it can take years to see the benefits. they hold lots of bond investments to maturity, so the ongoing average yield of their portfolio can be quite different to the yield they can get on new investments. that characteristic has protected insurers on the way down: portfolio yields today are still much higher than yields available on new bonds. but it also means that average portfolio yields are likely to continue to decline for some time before they turn round again. metlife said last week that the yields on its maturing bonds was between 1.5% and 2% higher than on those it was buying today. in europe, moody<u+2019>s estimates that this effect will shrink the industry<u+2019>s investment income by 3% to 7% each year for the next five years if rates stay where they are and companies don<u+2019>t invest in riskier assets. insurance stocks have struggled this year as the erosion of investment income has led to concerns about the sustainability of dividends, but have bounced sharply after the election. rising bond yields at least means income problems won<u+2019>t keep getting worse<u+2014>however, that is a long way from saying things will definitely get better. write to paul j. davies at paul.davies@wsj.com
why trump means no quick fix for insurers  - wsj
paul j. davies