Insurers see Q3 investment losses
Several major insurers including Travelers and Allstate saw disappointing Q3 investment returns, which could be part of a wider trend, according to analysis from AM Best.
Andrew Putwainposted on Wednesday, October 26, 2022
Some of the US’s largest non-life insurers have reported disappointing Q3 2022 results in their investment and asset management portfolios.
For several insurers, these Q3 results were in direct opposition to underwriting results, which remained profitable.
Connecticut-based P&C insurer, Travelers, which released its Q3 results last week, saw disappointing investment returns.
Its net income was $454m – a decrease of $208m – due to lower core income and net realised investment losses compared to net realised investment gains in the prior year's quarter. “Core income of $526 million decreased $129 million, primarily due to lower net investment income and a lower underlying underwriting gain, partially offset by net favourable prior year reserve development compared to net unfavourable prior year reserve development in the prior year quarter,” said the company’s statement.
“Unrealised losses on equities through the second quarter have exceeded losses suffered in the first quarter of 2020, at the start of the pandemic.”
Net realised investment losses were $93 million pre-tax and $72 million after-tax, compared to net realised investment gains of $8 million pre-tax, which was $7 million after-tax, in the prior quarter.
Rating agency AM Best said rising interest rates have pushed the value of bond holdings lower, leading to large unrealised losses on fixed maturities through the second quarter of 2022 (the most recent analysis available) on a GAAP basis. This shift impacted capital levels, which affected profitability.
“Unrealised losses on equities through the second quarter have exceeded the losses suffered in the first quarter of 2020, at the start of the pandemic, which has impacted capital using statutory accounting,” said the agency’s earlier in October, which specified some of the challenges to portfolios. “Underestimated lapse assumptions, disintermediation risk, and cash flow problems could lead to losses,” it added.
Further losses and portfolio restructuring
For Travelers’ fellow US giant Allstate, Q3 results were mixed too. All State saw an overall loss of between $675 million and $725 million, and an adjusted net loss estimated between $400 million and $450 million.
Its investment returns were also mixed. “Net investment income in the third quarter of 2022 is estimated at $690m, including performance-based investment income estimated at $335m. Three individual investments generated approximately 97% of the performance-based investment income in the Q3,” said the insurer’s statement.
The Illinois-headquartered company added that net losses on investments and derivatives for Q3 of 2022 are estimated to be $167m, which was largely reduced because of lower valuation on equity investments and losses on sales of fixed-income securities. This is “partially offset by a valuation and settlement of derivative gain of $299 million for the third quarter of 2022. The derivative gains were primarily from interest rate futures used as part of the duration reduction strategy.”
The company, one of the US’s largest non-life insurers, had revenue of nearly $44.6 billion in 2021 and had 46,000 employees pre-pandemic.
The total return on Allstate’s $61bn portfolio was 0.8% in Q3 2022 and 6.4% for the nine months to the end of September.
AllState's investment portfolio risk to inflation was reduced beginning in the fourth quarter of 2021 by shortening the duration of the fixed-income portfolio.
AM Best specified that this was a varied picture for insurers and could be a temporary issue. “The insurance industry generally operates on a hold-to-maturity investment strategy, so losses are not a major problem unless they are realised.”
“The last few economic downturns weren’t subject to rising inflation and rising interest rates at the same time.”
Their report said that varying patterns between different kinds of insurers (P&C, Life & Annuities, Health) could lead to a divergence of options on the best practices for handling investments and capital management, as well as greater volatility for companies.
“The last few economic downturns weren’t subject to rising inflation and rising interest rates at the same time. There appears to be no end in sight for economic uncertainty, downward stock market pressure, or volatility—as well as rising interest rates,” the report added.