Risks from mark-to-market losses, capital issues and liquidity from the failure of the Silicon Valley Bank (SVB) “do not have any significant read” across to the European insurance sector as it has a number of protective drivers, according to JP Morgan.
Analysts understand the market’s worries and have seen from share price volatility that investors are rightly cautious on asset risks for the insurance sector.
They noted that this was also true during the Global Financial Crisis, where some insurers did face unrealised losses on securities, but few faced any major capital or liquidity risks (apart from insurers with banking operations).
A key area of concern among investors is market-to-market losses on bonds. Under current IFRS4 accounting, most insurers carry sizable unrealised losses on fixed income, but with liabilities at a fixed value.
This, according to analysts, has led to a sharp decline in reported shareholders’ equity for some European Insurers.
“There is an understandable fear that insurers could be forced to crystallise such losses, particularly in a situation of increased lapses in savings policies,” JP Morgan explained. “There have also been questions from investors on accounting policies and the use of ‘hold-to-maturity’ accounting for fixed income assets that was an issue at SVB.”
Another area of concern is lapse risk. This is the risk that policyholders leave early and surrender their policies (essentially withdraw their liabilities) as they fret about asset risks, resulting in capital or profit implications for insurers.
Asset risk and credit risk in general is also worrying investors. This concern arose as the market gyrations led investors to look again at credit risks faced by insurers, and other asset risks such as commercial real estate, analysts noted.
“We have had increasing conversations with investors about insurers’ exposure to corporate bonds issued by banks, particularly regional banks in the US, possibly impacted by the issues surrounding SVB,” said JP Morgan.
Despite these understandable fears and concerns – particularly around liquidity risk and potential capital losses – the European insurance market has a number of protective drivers, JP Morgan analysts claimed.
Because of this, they believe that investor’s concerns about the sector are overdone.
Analysts said: “We believe the sector benefits from a number of protective drivers: Insurers do not take significant asset-liability duration risks; European insurers are very well capitalised with an average SII ratio of ~210%; European insurance unrealised capital losses in IFRS equity are generally not real economic losses; Insurers generally mark-to-market the vast majority of their IFRS balance sheet investments (mainly as available-for-sale), and all assets are marked to market, together with liabilities, under Solvency II; Insurer business models are not exposed to liquidity or major lapse risk. We believe European insurers have low exposure to regional banks in their portfolios.”
