Unrealised losses to fly by top 20 reinsurers: S&P Global

About 25% of the total unrealised losses will reverse by the end of the year.

On average, a 7% reduction in equity is estimated for the top 20 reinsurers for every 100 basis point increase in interest rates,  reported by S&P Global Ratings.

It was observed amongst the top 20 global reinsurers that shareholders’ equity fell by 20% last year, signalling an “imbalance” in accounting behaviour in the valuation of assets and liabilities.

However, these unrealised losses are expected to unwind rather than persist due to the strong financial positions of the reinsurers, the relatively short duration of their fixed-income portfolios, and reasonable cash inflow-outflow alignment. 

It is projected that about 25% of the total unrealised losses will reverse by the end of 2023, assuming interest rates remain consistent.

The increase in interest rates hasn't been beneficial for reinsurers. Whilst sharp rate increases in the past 18 months have benefitted reinsurers' investment income in 2023 and beyond, they also led to a material decline in the fair valuation of fixed-income investments held on their balance sheets and, in turn, their shareholders' equity positions.

Despite these valuation changes, the impact on the top reinsurers' financial stability is manageable. 

Their robust cash flow management practices and liquidity measures mitigate the need to realise these losses. Whilst the drop in shareholders' equity has raised concerns, the top reinsurers' financial strength and strategies suggest the limited risk of significant losses being realised. 

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S&P Global Ratings is closely monitoring interest rate shifts and unexpected liquidity stress that could pose challenges to reinsurers' balance sheets.

The substantial proportion of fixed-income investments has caused unrealised losses, resulting in reported shareholders' equity decreases for reinsurers that adhere to fair value accounting principles. 

However, the focus has been on fixed-income impacts, and risks have heightened in illiquid investments such as real estate, private debt, and private equity. 

Reinsurers increased exposure to these assets during the low-interest rate period. Further, the exposure is deemed relatively limited, and increased reinvestment yields help counter potential impairment pressures.

The report emphasises that reinsurers do not necessarily need to realise losses on their fixed-income investments, except when actively managing portfolios or facing unexpected liquidity stress. The report also assesses liquidity positions, and while some stress scenarios might lead to short-term cash needs, reinsurers' liquidity levels generally remain robust.

S&P Global Ratings acknowledges the potential impact of the material drop in shareholders' equity on other metrics like financial leverage ratios. The report underscores the importance of a multifaceted and forward-looking understanding of capital.

Overall, the shift to higher interest rates benefits reinsurers' investment returns, though heightened inflationary pressure and geopolitical instability warrant ongoing monitoring. Despite these challenges, reinsurers' disciplined underwriting approach and strong financial strategies provide a solid foundation for navigating fluctuations in the long-term.