Best urges insurers to focus on ERM in wake of SVB collapse

Rating agencies are keeping a close eye on insurers’ exposure to the banking sector following the collapse of technology lender Silicon Valley Bank (SVB) on Friday.

As markets opened Monday in Europe, the pan-European Stoxx 600 recorded a 2% slide by 10am UK time, with bank stocks leading at a near-6% drop, followed by insurance and financial services stocks. However, central banks and regulators have taken swift action to restore confidence in the wider banking sector in a bid to mitigate the risk of contagion.

According to AM Best, just eight insurers had bond exposure to SVB greater than 2% of their capital and surplus. The biggest exposure among these insurers was less than 5%.

However, five insurers had wider exposure to equities in the bank and trust sector greater than their capital position at year-end 2021, said AM Best. A further 20 insurers had equity exposure to banking and trust stocks equal to at least half of their capital, again using year-end 2021 figures.

Sridhar Manyem, senior director of industry research and analytics at AM Best, said SVB’s collapse, the second-largest bank failure ever in the US, has shocked banking stocks and follows closely behind the closure of crypto-lender Silvergate Bank on 3 March. Since SVB’s collapse on Friday, Signature Bank was closed by state regulators in New York on Sunday, the third-largest bank failure in US history.

“Some major bank stocks have lost significant value. Insurer exposure to the banking sector extends beyond stock price impacts, though, as many insurers depend on banks for lines of credit, distribution, hedges and other operational aspects,” Manyem said.

He advised insurers to respond to the SVB collapse with a focus on ERM and liquidity risk management. “Investment managers are navigating an interest rate environment that has not been seen in decades, and lessons from the past can help insulate from future mistakes,” said Manyem.

“Stress testing and scenario analysis of the impact of rising interest rates on asset-liability management and proactive management of these stresses through strategic actions and capital management would be considered favourably for insurers with interest-sensitive exposure,” he added.

In a bid to calm stock markets and offset contagion risks, the US government guaranteed all SVB deposits, beyond the federal insurance cap of $250,000, ahead of stock markets reopening Monday. Meanwhile, HSBC has bought the UK arm of SVB. This should further restore confidence in the tech sector and its bankers.

Germany’s financial regulator BaFin said there is “no systemic relevance” after it imposed a moratorium on the German branch of SVB, effectively blocking payments to and from clients. BaFin assured markets: “The distress of Silicon Valley Bank Germany branch does not threaten financial stability”.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said smaller tech-focused banks are set for a “very rocky ride” as the loss of confidence widens. But she said the risks of contagion to the wider banking sector “remains limited”.

Streeter added that HSBC’s offer to buy SVB in the UK will be welcome news for the tech sector.

“White knights are coming to the rescue after a weekend of intense negotiations to stem contagion from the SVB collapse, which sent shockwaves through financial and tech sectors. Investors are waiting with bated breath to see if this rush of regulatory activity to try to limit the fallout from the SVB bank collapse will help soothe volatile markets, and so far the bold action appears to be working,” she said.

She added: “This is all aimed at malaise spreading to the wider financial sector and, although confidence is being restored, jitters will remain about longer-term repercussions. SVB was considered to be the lifeblood for the tech industry, offering facilities that start-ups found hard to access elsewhere in the market, so although the immediate liquidity nightmare looks set to be lifted, worries will still linger about banking options ahead.”

Megan Greene, global chief economist at Kroll, agreed that SVB is unlikely to drive further banking failures. “SVB’s client base and funding structure both suggest that it is unlikely to trigger a systemic crisis. There may be some contagion to other small community banks in the US – particularly if depositors aren’t all made whole – but the larger banks are unlikely to follow in SVB’s footsteps,” she said.

“SVB was unusually exposed to interest rate risk. This is partly because its clients only thrived in a low interest rate world and cash funding for them evaporated as rates rose. But it is also because higher interest rates hurt the liability side of SVB’s balance sheet more than it benefited the asset side,” added Greene.