Goldman Sachs predicts that, the current economic situation will ultimately be beneficial for reinsurance companies.
In the short-term, companies might see lower investment income due to negative impacts on realised gains. But in the long-term, rising interest rates are economically beneficial for reinsurance companies, and higher reinvestment yield leads to higher future investment income.
The life segment of life insurance companies (e.g. Munich Re, ERGO Germany, L&H) will benefit from higher rates as the insurers can release funds as their capital requirement falls. When interest rates continue to increase to a position that is higher than the interest rate used in their calculation, insurance companies can release the provision because the solvency requirement reduces.
Goldman’s report also notes that Russia’s invasion of Ukraine has led to some companies (e.g. Munich Re) to write-down Russian and Ukrainian bonds.
They predict that, since market-to-market (MTM) losses are non-cash and non-economic, the losses will pull-to-par, reversing the trend as they mature. On the upside, higher reinvestment yield will have a greater impact in the short-medium term and flow through the portfolio faster, owing to the short-term duration.
For example, Hiscox’s reinvestment yield on its portfolio had increased to 2.4% by the end of the quarter (and 2.7% at end of April), vs. 1.0% at the year’s end.
It is likely there will be further MTM losses in Q2, but the underlying net investment income should be higher in the second half of the year and in 2023.
Reinsurance assets generally have a long duration, meaning the positive impact from higher reinvestment yield would be slower to flow through the portfolio.
Therefore, the decline in realised gains would be more prominent in the short term, before profitability increases steadily in the sector from 2023 onward owing to higher ordinary investment income.
