Insurers benefit most from a gradual rise in interest rates, according to a new note from Berenberg.
The firm said that interest rate volatility has affected insurance stocks in the past, pointing oto the crash of October 1987 and an unexpected tightening by the Fed at the beginning of 1994. Despite this not happening since, Berenberg said that this may be a reflection of the market expecting authorities to help ease a crisis.
Writing in its note, Berenberg said: “While insurers’ reported sensitivities that a 50bp rise in risk-free rates is generally positive for solvency, a sudden jump in risk- free rates of, say, over 100bp within a six-week timeframe can have a negative effect on insurers’ share prices.”
It added: “This is because of the perception that a sudden rise in interest rates may lead to a run on insurers. As far as we remember, this has never happened, but this has not stopped the market from becoming spooked in the past.”
Despite this, Berenberg said it expected to see six rates hikes by the end of the year within the US of 25bp each, along with five of 10bp each within Europe.
Berenberg said that, conversely, rising investment yields were of a benefit to every insurer.
It added: “Stocks which benefit most with higher earnings are the UK motor insurers (Direct Line and Sabre), SCOR, Helvetia, and Baloise. Tryg and the London Market insurers also have short-duration portfolios which is good indicator they will also benefit from higher earnings following a rise in interest rates, however, they account for fixed income assets as fair value through profit and loss; consequently, earnings are more likely to decline due to unrealised fair value losses.”
It went on: “Life insurers share the benefit with policyholders but NN reported last year a €245m uplift to OCG, ie to Solvency II earnings.”
