Did Rising Rates Cripple the Insurance Industry?
Rising interest rates was the dominant story in 2022. Did fixed income losses cripple insurance companies? Or has the insurance industry shifted the risk to your clients who purchased their products?
This has been the worst year in the history of the bond market. Through the first three quarters, a Bloomberg Aggregate Bond fund (BND) lost 14.50%. That will have a huge impact on life and annuity insurance companies which had, on average, 85% of their assets in fixed income, according to the Insurance Information Institute. The loss on the 85% fixed income was roughly the total capital surplus of the industry.
Let’s look at the insurance industry and, more importantly, the impact on our clients who own insurance products.
In October, my article in Advisor Perspectives summarized the bond performance from Edward F. McQuarrie, professor emeritus in the Leavey School of Business at Santa Clara University who has long researched the history of bonds:
Life and annuity insurers overall had the following investment allocations to fixed income on their balance sheets at the end of 2021:
While I don’t know the duration of these fixed income holdings, clearly the economic value of those assets plunged this year, though not necessarily their book value. I spoke with Dale Hall, managing director of research for the Society of Actuaries Research Institute, who confirmed that insurance companies do not mark to market. He stated “bonds bought at premium are recorded at cost and accreted. Bonds bought at discount are recorded at cost and amortized.”
But market value is far more important than any statutory accounting rule or the book value by which it is calculated.