Rate shock wears off and insurers open door to golden decade

Insurers, and life insurance in particular, have been trapped in low profitability by low interest rates for a decade. However, the huge rate hikes by the ECB and Fed not only had no immediate impact, but also created many problems for the industry. inflation and “shock” in the style of Silicon Valley Bank They created uncertainty that prevented us from enjoying the idea of ​​a new era of high interest rates. However, as the situation stabilizes, companies are rising sharply in the stock market and in many cases expect the sector to enter a new era.

The Bank for International Settlements (BIS) explained that “Tightening interest rates brought great relief However, these companies have performed well below expectations so far as rapidly rising rates have led to unexpected problems.

The fundamental reason is something similar to what happened to regional banks in the US and led to the failure of Silicon Valley Bank, Signatura Bank and First Republic. BIS notes that this industry has been the focus of the bond market because owns 20% of world bonds and huge price declines like those caused by higher interest rates “explain the worse performance of its shares.”

This has been the case in similar situations, especially in Europe, where the Italian insurer Eurovita had to be rescued in 2023 a consortium that brought together Generali, Intesa Sanpaolo Vita, Poste Vita, UnipolSai and Allianz. As with the Silicon Valley bank, its high exposure to failed bonds meant that Eurovita had serious liquidity problems and had to be supported externally to prevent its collapse. According to Reuters, the consortium has guaranteed $6 billion in funding to ensure clients get their money back, and by not having to sell their bonds, they have offset any losses.

“A stress scenario of a significant and sudden rise in bond yields and corporate spreads could lead to losses of 30%.”

Fears that such a situation will create a significant “hole” in the balance sheets of other similar companies and will put the entire financial sector under control have alerted the IMF itself. “Scenario of significant increase in stress and a sudden rise in bond yields and corporate spreads could cause insurers to lose market value by up to 30% in some jurisdictions,” the institution explained.

This problem, which has led to high interest rates that can lead to significant losses (the firm has to sell these bonds), has been mixed with high inflation, which is very dangerous for the sector. “Higher prices as well as Rising interest rates affect capital positions insurers by valuing assets and liabilities in line with the market and the necessary recalibration of their assumptions regarding the expected value of future claims,” explained the European Insurance and Occupational Pensions Authority (EIOPA).

The general rise in prices causes difficult situation for insurers, since this significantly affects almost all insurance industries, which usually take into account inflation and rising costs. Increases in claims, treatment or compensation costs were not matched by increases in revenue, resulting in lower profitability.

The situation has stabilized

However, as the shock stabilizes, and in particular from the end of 2023, the sector experiences significant momentum. An ETF covering the European insurance sector, iShares STOXX Europe 600 Insurance. accumulates a revaluation of 19% from November 2023 and by 12% in 2024. The increase is larger in the US, where the iShares US Insurance ETF is up 22% since November and 14% this year.

Despite everything, this shows very uneven progress, as different firms did not move forward in unison. Actually, Shares of US insurance giant Progressive rose 32%. in 2024 and Chubb – 18%, but shares of companies like Aon will fall 1.7%. In Europe, companies such as Axa rose 9.35% and Munich Re rose 21.65%. Swiss firm Swiss Re does the same at 18%. Allianz and Generali, although diversified into other financial services, are two of the industry’s two titans, with their shares up 6% and 21% respectively. In Spain, Mapfre rose 10% and Catalana Oeste rose 23%.

Now that there have been no sudden changes, and with a more stable high interest rate environment, some sector agents believe it is time to shine. That’s according to Swiss Re, which said the sector will experience a “boom” as it comes to market. a decade of high profitability. “Over the next ten years (thanks to higher interest rates around the world), 1.5 trillion in premiums will be generated for the industry, more than double what was generated in the previous phase.” After premium growth of just $300 billion over the entire 2010-2019 decade, “we project that life insurers will realize $1.5 trillion in premium savings over the 10 years starting in 2025, reaching $4 trillion in premium savings by 2034.” savings bonuses.

The logic behind this view is that even though the ECB has already started a new interest rate cycle since its June meeting, when you start your first descent, and the Fed appears to be moving in that direction this year (September of this year), all indications seem to be that the monetary environment has changed critically.

The era of ultra-low interest rates is not coming back anytime soon, and in fact the Fed’s roadmap suggests they will above 3.1% in 2023 and that “in the long run” they fall within 2.5%. Experts expect a similar situation in Europe, where, barring a fall in the “price of money,” a return to levels similar to those of the last decade is not expected.

Jérôme Jean Egely, chief economist of the Swiss Re group, explains that “savings products are attractive to consumers after a decade of weak demand and low productivity. “Swiss Re Institute expects fixed annuity sales to reach a new high this year following record sales in 2022 and 2023.”

“Higher interest rates are a game changer, giving life insurance and retirement products a tailwind to do a much better job of addressing the retirement savings challenges we face.” accelerates demographic aging“, explains Hageli. The expert further states that “savings products have become attractive again as a direct consequence of the normalization of interest rates. Higher investment returns also benefit long-term protection products.”

“Significantly higher government bond yields are now also boosting investment returns.”

Nils Bosse Parra, fund manager of ODDO BHF, explains: “Insurance companies benefit from rising rates percent of new higher-yielding bonds coming to market” and, in general, it is easier to find fixed-income investment assets with higher yields.

For his part, Paul Murray, CEO of life and health reinsurance at Swiss Re, explains that the big problem, which until now has been the rapid rise in bond prices, now appears to have stabilized. “Significantly higher government bond yields Now the yield is also improving life insurance company investments and fixed annuity margins.

There are still problems on the horizon

Allianz, Europe’s largest insurer, said that despite the problems that have rocked many of these firms,The insurance sector grew by 7.5% in 2023, This is the biggest annual increase since 2006, which saw the world’s insurers collect €6.2 trillion in life insurance premiums. In any case, they emphasize that much of this is due to inflation. The reality is that, excluding earnings, they have stagnated at 0.7% since 2020. Either way, they expect annual growth of 5% over the next decade.

S&P Global, although they didn’t buy into this apparent optimism, explained that something had clearly changed: “the future has become clearer.” The agency notes that “a trend that appears to be They are stubbornly the tallest guys.“That’s why only with high debt yields “will these companies have a mid- to long-term tailwind for the insurance industry.”

However, he points out that there are problems, especially in the US, due to “Impact of inflation on premiums and industry impact on commercial real estate (office business).” During these years of the collapse of this business, these firms have “reduced their exposure” and on inflation, “many firms are increasing premiums above the CPI”, which provides some relief.