22 MAR, 2023
By Rötger Franz
In light of the recent events surrounding Silicon Valley Bank, Credit Suisse, and others we reiterate that the situation is not a crisis in the insurance sector. Contagion risk for the insurance sector is very remote in our view and the recent revaluation of subordinated insurance paper is in our view an opportunity to add subordinated insurance paper. In this context we would like to highlight the following:
Insurance | Banks | |
Main Risk | Reserve adequacy | Liquidity |
Empiric evidence of «run risk» | Little | High |
Extension Risk | Strong Track Record of «meeting investor expectations» | Opportunistic behaviour in «meeting investor expectations» |
Asset- & Liability Mismatch | Event driven liabilities, Asset-Liability Mismatch is low and not part of business | Asset-Liability Mismatch is source of earnings and risk |
Probability of regulatory intervention | Large capital buffers; regulatory interventions are rare | Several additional capital buffers (Systemic Risk Buffer, Countercyclical Buffer) make required capital more volatile and regulatory interventions more likely |
Claims/Losses | Claims are pre-financed by premiums; settlement of claims can take weeks or even years. Time lag enables insurers to consider their options to maintain their capitalisation | Losses occur quickly and can develop into “self-fulfilling prophecies” damaging trust in the financial institution |
Against this background, there is in our view no fundamental support for the recent revaluation of subordinated insurance debt which was caused by a general financials sell-off and rebalancing of portfolios. Instead, investors benefit from the limited impact of the current situation in the banking sector on the credit quality of insurers and the absence of contagion risk in the insurance sector. I.e. the recent sell-off offers a good window of opportunity for investors to invest in the high quality of insurance balance sheets at very low levels.
By RankiaPro Europe