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Several major insurers that announced losses in their Q3 portfolios in recent weeks could be the start of an ongoing pattern for the next few quarters, warned Ken Johnson, Managing Director, AM Best.
“The primary driver of lower investment returns being reported by insurers has been increased market volatility on fixed income and equity markets,” said Johnson. “This has been a function of a rapid rise in interest rates as the [US] Federal Reserve combats inflation. These negative impacts seen in Generally accepted accounting principles (GAAP) results, versus statutory accounting, have been more pronounced due to the use of marked-to-market accounting.”
Johnson added that insurers are experiencing the combined negative impact of a declining equity market – for both public and private equity – in addition to a rapid increase in interest rates that harms fixed-income securities. This negative impact is expected to continue through Q3 2022 results and will be more pronounced for life insurers due to their higher investment leverage.
Several other major reinsurers have announced their Q3 results on both sides of the Atlantic: Gallagher saw an increase in investment returns from $25.1m in Q3 2021 to $36.4m across the business. The wider results saw big names such as Swiss Re report a $442m loss.
The Swiss company, one of the world’s largest, saw a “Return on investments (ROI) of 1.6%, reflecting negative mark-to-market impacts on listed equity investments; Q3 recurring income yield increased to 2.8.” This was compared to an ROI on investments of 3% in Q3 2021.
"The industry has made adjustments to manage through this economic
environment such as shortening portfolio duration."
Swiss Re listed “significantly lower investment results” as one of the reasons for their loss.
Johnson said due to the insurance industry being primarily a buy-and-hold industry, these impacts are not expected to negatively impact operations as they reverse approaching maturity.
“However, the industry has also made various adjustments to manage through this economic environment such as shortening portfolio duration, investing in floating rate assets, and ensuring liquidity remains strong,” he added. This included shorter durations, which will effectively lower the marked-to-market impact although this needs to be managed within the constraint of maintaining prudent asset and liability management. In addition, Johnson said, it will allow the company to invest maturing dollars at higher market rates.
Other re/insurers such as Munich Re, Marsh McLennan, and Arch, have or were still expected to post moderate Q3 profits. Ageas, Everest, and AXIS all saw losses. Everest’s Q3 losses were over $300m.
Marsh McLennan also saw large swings between 2021 and 2022 investment returns.
The market has seen an increase in floating rate investments as well, which eliminated any GAAP marked-to-market impact.
“[These conditions] allow insurers to benefit from rising interest rates. However, floating rate debt places more stress on the issuer and potentially leads to increasing defaults down the road for insurers,” Johnson said of this trend. “With respect to liquidity, the industry has somewhat increased its holdings in more liquid assets to offset higher portions of private credit thereby taking a barbell approach.”
He added that insurers have increased their access to additional liquidity through bank facilities, particularly with the regional Federal Home Loan Banks.
"Companies will factor the current interest inflationary environment
into their product pricing and reserving."
The industry will have to wait and see if recent volatility settles down. Currently, rising interest rates will continue to have a negative impact on investment portfolios, but they can also have a positive impact on certain reserves, which get discounted at a higher rate.
“Companies will factor the current interest inflationary environment into their product pricing (a positive) and reserving (a negative). However, reserves that are discounted will see a benefit from using a higher rate as well,” he said.
