Fitch, AM Best see little direct impact from bank failures on insurers
Fitch Ratings’ estimates little direct exposure by US insurers in the recent banking turmoil.
And while AM Best agrees, their commentary noted that despite minimal exposure to bonds issued by the now-shuttered Silicon Valley Bank, the failure highlights the importance for insurers of managing enterprise, asset-liability and liquidity risks.
Best said a second principle takeaway is that issues related to D&O may emerge if the Federal Deposit Insurance Corporation and other shareholders put the board and executive management under examination.
Fitch stated that rated life insurers with exposures should have sufficient capital to withstand losses and related market volatility.
The agency said that insurers’ stable liability and funding profiles will generally enable them to hold bonds until maturity, reducing pressure to sell them at a loss.
But Best said the ramifications could be more significant for insurers’ equity portfolios than for their bond holdings.
The 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.
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.
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 said 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 favourable rates. Its sector outlooks for US Life and US P&C are ‘neutral’.
Meanwhile, Best saw SVB Financial Group as a possible casualty of rising interest rates and of insufficient risk management to address the asset/liability issues because of those rising interest rates.
The bank catered primarily to higher-risk tech start-ups, which have also been hurt by higher interest rates and dwindling venture capital.
Best said: “As interest rates rose the past year, financially strapped venture capital firms found it more difficult to access funding, and many pulled their deposits from the bank.
“The reported value of SVB’s bondholdings declined, and the bank reported a notable loss after selling approximately $20 billion of its fixed-income portfolio.
“According to published reports, SVB tried and failed to raise $2.3 billion through stock sales to cover a $1.8 billion loss on the fixed-income sale.
“As SVB sought to raise equity capital, its clients, which saw this as a move to raise money for losses and started withdrawing funds, caused a run on the bank.
“Given SVB’s inadequate liquidity and insolvency, the California Department of Financial Protection and Innovation took the bank over the bank on March 10, 2023. ”The US Federal Deposit Insurance Corporation will be the receiver.“
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