The increase in the net interest margin year-over-year was primarily due to rising interest rates, higher reinvestment rates
on maturing securities, and loan portfolio mix, partially offset by deposit and funding mix.
Life insurers continue to trade asset liquidity for yield to mitigate the impact of low reinvestment rates
. The shift to less liquid asset classes includes an increase in investment in private placements and leveraged loans, which may underperform in a credit market downturn.
"For the first time in a decade--for sure on the P/C side and maybe a little less on the life side--we've got the opportunity to stabilize book yield or even increase book yield based on where reinvestment rates
are today," said Bill Rotatori, chairman and CEO of New England Asset Management.
The Barclays analysts suggested that the actuarial reviews will pinch Canadian life insurers' earnings, because a new Canadian rule on accounting for asset reinvestment rates
will make the insurers add to their reserves.
That was driven by low reinvestment rates
and reduced alternative investment income.
Piketty's fears are misguided for two reasons: (1) He mistakes the return on capital (r) for the growth of capital (g), as discussed above; and (2) he fails to account for differential returns (r) and reinvestment rates
(s) across generations and types of investors.
It will have little impact to the bottom line, especially at current reinvestment rates
core net interest margin as a result of lower reinvestment rates
The decline against the prior year quarter was primarily due to lower yields as a result of lower reinvestment rates
and net cash outflows from the investment portfolio, the firm said.
He cites this as his biggest concern, and notes that while after-tax returns have not been impacted much due to better municipal returns and the purchase of a "fair-sized portfolio of high-quality, dividend-paying common stocks, the fact is, our yield has come down by probably 40 basis points or so, and is probably going to come down by another 15 or 20 points by the end of the year, because cash flow is coming in and reinvestment rates
are not as attractive."
Reasons include: Poor returns on deposits - Those earning a good rate due to a historic fixed rate bonds will be seeing these come to maturity and reinvestment rates
will tend currently to be poorer.