Insurers’ stable liability and funding profiles will allow them to hold bonds until maturity, reducing pressure to sell at a loss
Fitch Ratings’ initial analysis around rated U.S. insurers’ exposure to now-failed banks indicates little direct exposure. Rated life insurers with exposures should have sufficient capital to withstand losses and related market volatility.
Insurers’ stable liability and funding profiles will generally enable them to hold bonds until maturity, reducing pressure to sell them at a loss. However, financial system interconnectedness and second-order effects could present short-term challenges.
Insurers’ investments to the failed banks (Silicon Valley Bank, Silvergate and Signature Bank) are modest.
Fitch-rated insurance entities’ direct investment exposure to the failed banks (comprising debt and equity) is estimated to total $1.16 billion, with most of the exposure concentrated among life insurers.
Interest rates present a challenge
While higher interest rates create certain challenges for US insurers, Fitch views the liability profiles of insurers as being comparatively stable.
Like banks, US insurers, particularly life insurers, are large bond investors. The value of insurers’ bonds declined markedly in 2022, and for many large insurers, contributed to an overall decline in shareholders’ equity.
Fitch-rated US life insurers reported an aggregate 59% decline in GAAP basis shareholders’ equity in 2022, primarily related to rising interest rates.
Notwithstanding these mark-to-market losses, Fitch believes that insurers’ stable liability and funding profiles will generally enable them to hold these bonds until maturity, reducing pressure to sell them at an interest-rate-driven loss.
US insurers’ regulatory capital ratio generally values bonds at amortised cost rather than market value. As a result, insurers’ interest-rate driven bond portfolio unrealised losses are unlikely to create regulatory capital funding needs.
In contrast, banks’ primary regulatory capital ratio, depending on the bank’s size and accounting treatment, incorporates a portion of interest-rate-driven unrealised losses.
The movement to higher market interest rates in the U.S. over the past 12 to 15 months has created near-term challenges for insurers.
Additionally, insurers are grappling with heightened macroeconomic volatility and the potential for a recession driven by geopolitical uncertainty, as well as differing expectations on the Federal Reserve rate tightening path, which the aforementioned bank failure exacerbated.
Fitch views the current interest rate environment as favourable for insurers’ earnings, but notes that the benefits are derived over time as portfolios turn over and insurers reinvest at more favorable rates. The rating agency’s sector outlooks for US Life and US P&C are ‘neutral’.