Low risk of Silicon Valley Bank-style liquidity crunch for US insurers

US insurers are unlikely to face a Silicon Valley Bank-style liquidity crunch because their sources of funding are more stable and they are well positioned to manage unrealised investment losses, according to DBRS Morningstar. But it adds that pockets of risk remain in the short term.

In a commentary discussing the impact of unrealised investment losses on US insurance companies’ balance sheets and solvency levels in the context of rising interest rates, DBRS Morningstar says US property and casualty (P&C) insurers proportionally invest less in bonds with long maturities as their insurance liabilities are generally short term, which mitigates the impact of mark-to-market losses in their investment portfolios.

It adds: “P&C insurers’ sudden liquidity needs are also usually driven by natural catastrophe losses that benefit from reinsurance protection.”

Marcos Alvarez, global head of insurance, DBRS Morningstar, said: “In our view, the likelihood of US insurers facing a liquidity crunch similar to the one recently experienced by Silicon Valley Bank, which concluded in regulatory intervention on 10 March 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. Despite causing initial unrealised losses in insurers’ investment portfolios, increasing interest rates are typically positive for insurance companies’ results as they reinvest maturing bonds at higher yields.”

But DBRS Morningstar notes in the commentary: “However, when insurers sell bonds classified as held-to-maturity, any unrealised losses will be immediately recognised in net income. At the same time, the disposition of available-for-sale securities will imply a transfer of unrealised losses from accumulated other comprehensive income to net income under US GAAP. Depending on the size of these losses, this recognition of previously unrealised losses could affect solvency levels and threaten the viability of insurance companies.”