U.S. Insurers Are Well Positioned to Manage Unrealized Investment Losses but Pockets of Risk Remain in the Short Term

DBRS Morningstar published a commentary discussing the impact of unrealized investment losses on U.S. insurance companies’ balance sheets and solvency levels in the context of rising interest rates.

Key highlights include the following:

• U.S. life insurance companies are less likely to suffer from asset-liability mismatches and the realization of mark-to-market losses in longer-dated bond portfolios than banks because of the long-term duration of their liabilities.

• U.S. P&C insurance companies typically invest in securities with a shorter duration, given that most policies have a one-year term. P&C insurers’ sudden liquidity needs are also usually driven by natural catastrophe losses that benefit from reinsurance protection.

• The NAIC has allowed U.S. life insurers to amortize realized investment losses through time via the Interest Maintenance Reserve, which mitigates the impact of interest rate movements on solvency and capitalization levels.

“In our view, the likelihood of U.S. insurers facing a liquidity crunch similar to the one recently experienced by Silicon Valley Bank, which concluded in regulatory intervention on March 10, 2023, is low because insurers’ sources of funding are much more stable than those of banks, given the nature of the insurance business that allows a better asset-liability matching,” said Marcos Alvarez, Global Head of Insurance. “Despite causing initial unrealized losses in insurers’ investment portfolios, increasing interest rates are typically positive for insurance companies’ results as they reinvest maturing bonds at higher yields.”