Interest rate rises have revealed a major dilemma for the US property and casualty sector, according to a report by ratings agency Moody’s.

It says the insurers hold about $US900 billion ($994 billion) in bonds, leaving them exposed to fixed-income market developments.

For each 100 basis point rise in interest rates, the value of bonds held by the industry will drop about $US40 billion ($44.18 billion) – or 7% of industry capital.

Moody’s says continued low rates will challenge the industry’s profitability, due to the difficulty of generating investment income in a low-yield environment.

If yields drop to levels seen in the first quarter of this year and stay there several years, the industry will face a $US3 billion ($3.31 billion) decline in investment income annually over the next five years.

“In the current environment, P&C companies face investment risk regardless of interest rate direction,” report author Paul Bauer said.

“If rates continue moving up, which we believe is the more likely scenario, companies will face capital volatility as bond prices decline. If rates stay low, or resume their long-term downward trend, earnings will be pressured by weak investment income.”