Study Says P&C Insurers Face
Drop in Value on Investments
BY MARK E. RUQUET
Property & casualty insurers could see a drop in the value of their fixed-income securities investments
if interest rates climb as expected, accord-
ing to Moody’s Investors service.
the ratings agency says that about two-
thirds of the industry’s $1.3 trillion invested
assets is in fixed-income securities. Most of
these are “conservatively positioned” in
u.s. government and agency securities,
high-quality municipal bonds, and
investment-grade corporations.
While this investment strategy “served
insurers well in recent years,” Moody’s says,
interest rates are expected to increase—
impacting the value of the bonds.
over the next year, interest rates
are expected to rise between 1 to 1.5
percent and possibly as much as
3 percent over the next two years, according
to the ratings agency.
“Interest-rate increases could result in a
capital loss of between $40 billion and $60
billion on the industry’s $874 billion bond
portfolio in 2012—7 percent to 11 percent
of its equity-capital base,” says paul Bauer,
Moody’s vice president and author of the
Interest-rate increases could result in a
capital loss of between $40 billion and
$60 billion on the industry’s $874 billion
bond portfolio in 2012, Moody’s says.
report. “this projection is based on our
central economic scenario for the united
states, which forecasts a 100 to 150 basis-
point rise in rates over the next year.”
However, while the value may drop, it
does not necessarily mean insurers would
see an actual loss, Bauer notes.
a study of bond duration indicates that
many insurers have invested in short-term
bonds with an average duration of around
4 years. unless they are subjected to a
catastrophic loss and need to raise capital,
p&c insurers typically hold onto their
bonds until maturity.
It is only when they sell before maturity
that they realize a loss, because investors
are not going to purchase a bond at a lower
interest rate than the general marketplace
unless they buy it at a discount.
realizing this, Bauer says many insurers’
investment strategies appear to have opted
for short-term bonds.
“We believe companies have generally
chosen to keep portfolio duration on the
short side as a result of low-interest rates
and expected future rate increases, as
well as an inability to generate significant
additional returns by extending maturities
out on the yield curve,” he says.
In the meantime, “companies are
raising insurance-premium rates, in part to
offset anemic investment income and to
boost overall profitability.” NU
After FSOC Rule, Industry Maintains
P&C Not Systemically Risky
property casualty Insurers association
of america, says in a statement, “the
final fsoc rule takes important steps to
recognize that traditional home, auto
and business-insurance activities are not
BY ARTHUR D. POSTAL
SpokesMen for insurance-trade groups insist that when all is said and done, officials of the financial
stability oversight council (fsoc) will
support insurers’ view that insurance
activities, by their very nature, do not
pose a threat to the stability of the
u.s. financial system.
J. stephen Zielezienski, the
american Insurance association’s
general counsel, says the aIa believes
property & casualty insurers should
be screened out of the systemically
important financial institutions (sIfI)
designation since they do not pose a threat
to financial stability.
“aIa hopes that [the fsoc] will use the
designation sparingly and apply it only to
the companies that pose a systemic threat
to u.s. financial stability.”
Ben Mckay, senior vice president of
federal government relations for the
should be subject to regulation by the
federal reserve Board because, under the
criteria established under the Dodd-frank
act, it represents a potential risk to the
stability of the u.s. financial system.
Jeff schuman, a keefe, Bruyette &
Woods (kBW) life-insurance analyst, says
the financial stability oversight council’s
final rule casts a wider net than expected
over those that might get a closer look and
takes an “expansive view” of defining
a company’s debt.
Brian Gardner, also a kBW
analyst, says the rule will allow the
second and third steps of the fsoc’s
screening process to provide for a
“narrowing from a broad universe,
which will create something more
manageable for the fsoc to consider.”
“the sIfI designation will ultimately
not be reduced to simple rules and
calculations,” he adds, calling the
process “a fluid exercise, not static.
companies first designated could later
be undesignated; this will be a dynamic
process.” NU
AIA hopes that [the
FSOC] will use the designation
sparingly and apply it only to the
companies that pose a systemic
threat to U.S. financial stability.”
J. Stephen Zielezienski, the American
Insurance Association’s General Counsel
systemically important.”
Mckay adds that the Dodd-frank
act appropriately treated insurance very
differently than other sectors of the
financial-services industry.
the final regulation establishes a three-step screening process for determining
whether a non-bank such as an insurer