Although insurers’ exposure to the banking sector extends beyond stock impacts, providers of life insurance are less vulnerable to the kind of short-term volatility seen with the failure of Silicon Valley Bank (SVB), according to AM Best.
The ratings agency reports that, based on year-end 2021 data, just eight companies have bond exposure to SVB greater than 2% of their capital and surplus, with the maximum being less than 5%.
More broadly across the banking and trust sector, five insurers have equity exposure greater than their capital position, and 20 have exposure totalling at least half of their capital.
SVB, which was the preferred bank for the technology sector, saw a rise in demand for its services throughout the pandemic, with many firms using the bank to hold cash for payroll and other business expenses. As the deposits grew, SVB invested a large portion, which is typical for banks.
As widely reported in the mainstream media, the issue began when SVB invested heavily in long-dated U.S. government bonds, including those backed by mortgages. While these bonds were perceived to be safe, the rapid rise in interests rates by the Federal Reserve to tackle inflation, saw the prices of these bonds fall, in turn leading to a significant drop in value of SVB’s bond portfolio.
The bank’s customers began drawing on their deposits and SVB didn’t have sufficient cash on hand, so it started selling some of the bonds at large losses, which in turn spooked investors and customers, ultimately leading to the collapse of the bank on March 10th, 2023.
“SVB’s failure, along with the recent shutdown of Silvergate Bank, has caused a shock to a number of stocks in the banking sector. As we have already seen, some major bank stocks have lost significant value,” said Sridhar Manyem, senior director, industry research and analytics, AM Best.
“Insurer exposure to the banking sector extends beyond stock price impacts though as many insurers depend on banks for lines of credit, distribution, hedges and other operational aspects. However, life insurers are not as vulnerable to short-term volatility and a run-on-the-bank scenario that we saw with SVB, or banks in general,” added Manyem.
According to the ratings agency, examples such as Equitable Life in the UK in 2001, General American in 1999, and Executive Life in 1991 demonstrate that the possibility does exist, and underlines the importance of ERM in general, and liquidity risk management in particular.
“Investment managers are navigating an interest rate environment that has not been seen in decades, and lessons from the past can help insulate from future mistakes.
“Stress testing and scenario analysis of the impact of rising interest rates on asset-liability management and proactive management of these stresses through strategic actions and capital management would be considered favorably for insurers with interest sensitive exposures,” said Manyem.
