Despite noting that certain investors feel that reinsurers are now more exposed by their shorter investment portfolio durations, analysts at Morgan Stanley believe that the impact should be marginal, while investment income should continue to see upside as most reinsurers are still witnessing improving investment yield.
Morgan Stanley pointed out in a recent report that given recent economic data and comments from the Federal Reserve, a host of investors feel that the end of a rising interest rate environment is near.
According to Morgan Stanley’s analysts, this could have a more notable effect on the yield of shorter-term fixed-maturity assets.
“As reinsurers moved more towards property cat in 2023, several reinsurers also shortened their investment asset durations,” the analysts explained.
They continued, “As such, a peak in interest rates could place a headwind to the reinsurers as future earnings expectations decline.
“From our perspective, the potential peak in short-term interest rates could place a headwind on investment income growth, but the current book yield is still well below current interest rates. As such, the overall EPS expansion story should remain intact, in our view.”
Morgan Stanley observed that since 2021, the investment portfolio duration for Everest and RenRe shortened while the duration for Arch increased.
“In RenRe’s case, the more notable decrease in investment asset duration was due in part to holding cash in 3Q23 for the Validus transaction,” the firm’s analysts said.
They continued, “As a percentage of the total investment portfolio, Arch and Everest decreased exposures to the longer term fixed maturity portfolio and increased the one year or less fixed duration assets.
“Both companies also marginally increased exposure to asset-backed securities. While duration did shorten, we do not see this as significant enough to serve as a major concern for the 2024 investment thesis.”
