Rating agency Fitch on Thursday cut Swiss Life Holding AG's (SLHN.VX) credit grade as concerns increase about the deteriorating business environment and weak financial markets.

This, analysts say, could bode poorly for other life insurers that are also struggling with the recession and low interest rates, which can cut deeply into both policy sales and financial returns.

Fitch cut Swiss Life's credit rating to Triple-B from Triple-B-plus and put the outlook on the insurer's rating at negative due to "unfavorable interest-rate movements and the potential for the economic downturn."

One of Fitch's major concerns is the company's weakening embedded value, which reflects an insurer's future profit and revenue streams. This figure was hurt in 2008 because of the investment guarantees on some of Swiss Life's insurance and savings policies.

These investment guarantees mean that Swiss Life, like many other European and U.S. insurers that sell products such as variable annuities, must pay policyholders a specific investment return irrespective of the financial market situation.

If financial markets are weak, the risk of investment losses rises. This can eventually hurt an insurer's capital, which is important for any insurer to do business because it must have equity and cash reserves to back up any policies it writes.

Generally, interest rates decline in a weak economy. Much of an insurer's investment income is linked to interest-bearing products.

"Future profits of the company are highly sensitive to further interest-rate drops and losses on equity and property," said Clara Hughes, associate director in Fitch's insurance team. A 100-basis points drop in interest rates could hurt embedded value substantially, she added.

Swiss Life, which declined to comment on the rating action, isn't isolated with this risk. Many of its peers are struggling with similar problems as they have promised customers stable investment returns even in times of crisis.

At an investor conference in June in New York, insurance executives were aware of the challenge. Steven Kandarian, chief investment officer of MetLife Inc (MET), warned that a prolonged period of low interest rates could "cause problems and wreak havoc" for a life insurance company.

For this and other market-related risks, Standard & Poor's a put negative outlook on the U.S. life insurance sector in October 2008, when financial markets sagged in the wake of the Lehman Brothers collapse.

Analysts fear that if interest rates remain at current subdued levels, life insurers will have difficulty producing enough investment returns to satisfy customers. In such a scenario, premium growth is likely to be hurt.

Also, insurers could be tempted to take bigger financial market risks and could thus face huge asset write-downs in the event of sliding equity and bonds prices, analysts said.

During the current financial crisis, most insurers have avoided taking high equity and bond risks, something that could change should a low-interest-rate environment tempt insurers to pursue a riskier path.

At 1305 GMT, the Stoxx Europe 600 Insurance index was down fractionally, underperforming the banking index, which was up 1%. The banking sector got a lift Thursday as Credit Suisse Group (CS) followed competitors such as Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) with a strong set of second-quarter earnings.

-By Goran Mijuk, Dow Jones Newswires, +41 43 443 80 47; goran.mijuk@dowjones.com