Rising rates reduce the fair value of fixed income securities held by re/insurers

The movement of interest rates this year has reduced the carrying value of fixed income securities held by insurance companies.

According to Moody’s, this has lowered reported equity for insurers that mark such securities to fair value. However, it said that its credit analysis focuses on underlying economic fundamentals, and it views the rise in rates as generally beneficial for insurance companies because it increases investment yields and profitability.

Rising rates reduce the fair value of fixed income securities. Interest rates have spiked significantly in multiple regions in 2022.

Although this has reduced the fair value of fixed income securities, the largest asset allocation in most rated insurers’ investment portfolios, the impact is muted by the offsetting impact on insurance reserve liabilities, which are not affected by the increase in rates because they are not marked to fair value.

Equity decline affects key metrics, but we look through this volatility. The decline in value of fixed income securities has resulted in a significant decline in reported equity for many insurers.

Reduction in equity affects metrics and ratios that use equity in the denominator, including leverage, return on capital and high risk asset ratios. The analysis looks through equity volatility to insurers’ underlying balance sheet strength and liquidity.

Interest rates so far been a net benefit for insurers. It said that declines in equity generally do not impact regulatory capital.

Most regulatory jurisdictions do not consider equity reported under IFRS or local GAAP in the determination of regulatory capital.

Solvency II and US Risk Based Capital are based on regulatory reporting. In some jurisdictions in Asia-Pacific, however, reported equity is a starting point in calculating regulatory solvency ratios. There, declines in equity could increase the risk of insurers needing to raise capital to avoid breaching minimum solvency metrics.