S&P Global Ratings has said it does not view current unrealized losses on the majority of fixed-income securities for the top 20 global reinsurers as a material risk because of the reinsurers’ approach to cash flow management.
According to S&P, this, along with robust liquidity, limits the risk that reinsurers will have to realise the losses.
“While sharp rate rises in the past 18 months will benefit reinsurers’ investment income in 2023 and beyond, they also led to a material decline in the fair valuation of fixed income investments held on their balance sheets and, in turn, their shareholders’ equity positions,” S&P explained in a recent report.
According to the rating agency, for the top 20 reinsurers globally, shareholders’ equity dropped by 20% at year-end 2022 compared with a year earlier, reflecting in part the “imbalanced accounting treatment between the valuation of assets and liabilities.”
S&P Global Ratings credit analyst Charles-Marie Delpuech, went on, “While these valuation changes look like they could be a cause for concern, we do not view them as posing a material risk for the top 20 reinsurers because of the reinsurers’ approach to cash flow management.”
Delpuech said that along with robust liquidity, this limits the risk that the losses will have to be realized.
He continued, “We will monitor changes in rates and any unexpected liquidity stress, because these could bring unexpected challenges to reinsurers’ balance sheets.
“We generally observe robust levels of liquidity for the top 20, with a high proportion having S&P Global Ratings-calculated liquidity ratios exceeding 200%.
“We expect that the long-term focus on underwriting prowess will remain key for reinsurers, with potential better investment income unlikely to divert their attention away from demonstrating their sound underwriting focus.”
S&P said that overall, the sustained elevated interest rates “will favor reinsurers’ investment returns due to their substantial holdings of high credit quality fixed income securities.”
The rating agency noted that while financing expenses will rise, they will only moderately counterbalance some of the anticipated enhancements in net income.
S&P’s report reiterated the aforementioned points, concluding, “As the increase in rates is a response to elevated inflation and geopolitical uncertainty, we will persist in observing the escalated inflationary pressures on the claims aspect.
“Anticipating that the enduring commitment to underwriting prudence will persist, it becomes even more crucial for reinsurers, with the possibility of improved investment earnings, to adhere to their solid underwriting priorities.”
