National Underwriter - April 16, 2012

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.