Best's Special Report: Rising Interest Rates Leading to Large Unrealized Losses on Fixed Maturities
Publicly traded insurers have reported more than $200 billion of unrealized losses on their fixed income portfolios through the second quarter of 2022, as rising interest rates have diminished bond values, according to a new AM Best report.
In its Best's Special Report, "Rising Interest Rates Leading to Large Unrealized Losses on Fixed Maturities," AM Best states that more than one quarter of publicly traded insurers have lost over 20% of their year-end 2022 shareholders' equity due to rising interest rates pushing down the market values of current bond holdings. Life/annuity insurers, with their longer portfolio durations and the need to match with their lengthier duration liability profile, were more significantly impacted.
"With the Federal Reserve raising interest rates further in September 2022 and bond rates continuing to rise, unrealized losses are expected to grow further through the third quarter," said Jason Hopper, associate director, industry research and analytics, AM Best.
The unrealized losses of $203 billion through the second quarter exceeds the losses suffered in the first quarter of 2020 at the start of the pandemic. For life/annuity insurers, 7% of their bond holdings will mature within the next year, while property/casualty and health insurers have nearly double the percentage of bonds maturing, at 15%. Bonds maturing in the near term will be a favorable development, as the proceeds from these bonds can be invested at a higher rate in the higher interest rate environment.
Additionally, as yields on their investment portfolios rise, U.S. GAAP filers may find some relief and offsets for their unrealized losses on assets by way of higher reserve discounting rates. However, 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.
The report notes that since the insurance industry generally operates on a hold-to-maturity investment strategy, the losses are not a major problem unless they become realized. Although insurers have improved their liquidity since the initial shock of the pandemic, and additional liquidity can be tapped via avenues such as the Federal Home Loan Bank (FHLB), companies that need to sell assets to meet cash flow requirements will be the most impacted, as they will have to sell their bonds at a deeply discounted price, to meet liability payments. Companies in runoff and winding down assets without a revenue source also may be more vulnerable than currently operating insurers.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=324822.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
Copyright © 2022 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.
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