According to a report from AM Best, publicly traded insurers have reported more than $200bn of unrealised losses on their fixed-income portfolios through the second quarter of 2022, as rising interest rates have diminished bond values.
The report states that over a quarter of publicly traded insurers have lost more than 20% of their year-end 2022 shareholders’ equity due to rising interest rates pushing down the market values of current bond holdings.
Among those who were more significantly impacted were life/annuity insurers, due to their longer portfolio durations and the need to match with their lengthier duration liability profile.
AM Best also notes that the unrealised losses of $203bn through the second quarter exceed the losses suffered in the first quarter of 2020 at the start of the pandemic.
Jason Hopper, associate director, industry research and analytics, at AM Best, commented, “With the Federal Reserve raising interest rates further in September 2022 and bond rates continuing to rise, unrealised losses are expected to grow further through the third quarter.”
7% of life/annuity insurers’ bond holdings will mature within the next year, says Best, while property/casualty and health insurers have nearly double the percentage of bonds maturing at 15%.
The report notes that bonds maturing in the near term will be a favourable development, as the proceeds from these bonds can be invested at a higher rate in the higher interest rate environment.
It adds that U.S. GAAP filers might find some relief and offsets for their unrealised losses on assets by way of higher reserve discounting rates as yields on their investment portfolios rise.
However, Best notes that portfolio yield increases would lag new money rates, so the benefits of higher discount rates for liabilities are not matched with the decline in assets.
Best’s report observes, “Since the insurance industry generally operates on a hold-to-maturity investment strategy, the losses are not a major problem unless they become realised.”
Despite insurers having improved their liquidity since the initial shock of the pandemic, and additional liquidity available via avenues such as the Federal Home Loan Bank, companies that need to sell assets to meet cash flow requirements will be the most impacted, says Best, as they will have to sell their bonds at a deeply discounted price to meet liability payments.
Additionally, the report notes that companies in runoff and winding down assets without a revenue source might also be more vulnerable than currently operating insurers.
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