OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best views prolonged rising stock market volatility as a credit negative for U.S. insurers with significant equity exposure; in particular, stock market leverage for the property/casualty (P/C) segment has crept up since the most-recent financial crisis and life insurers are still sensitive to equity markets though they have employed mechanisms to de-risk.
The Best’s Special Report, titled, “Rising Volatility: Negative Implications for Insurers,” states equity market volatility has been elevated since the spike in early February 2018, and with the announcement of steel and aluminum tariffs, the stock market will most likely experience more volatility than last year. Equity market volatility historically has had severe negative implications for life insurers whose assets and liabilities correlate strongly with equity prices. Nevertheless, de-risking in the form of decreased exposure to annuities, and new products such as managed volatility funds have dampened the sensitivity. For P/C and health insurers, the sensitivity to the equity markets is proportional to their equity holdings in general and equity holdings leverage.
On a total industry basis, the P/C segment’s stock market leverage is 36%, but this number is heavily influenced by two of the largest companies, Berkshire Hathaway Specialty Insurance Company and State Farm Indemnity Company, which hold 30.4% of the P/C segment’s total capital and surplus.
Although changes in equity values affect the capital and surplus of all sectors, only the life/annuities segment sells products that are tied to the equity markets. Steps variable annuity writers took to de-risk their products since the late-2000s have proven effective in limiting earnings volatility; however, the de-risking measures, along with the increased investment fees associated with managed volatility funds, have made newer variable annuity products less attractive to consumers and is one reason among many other reasons that have caused a decline in sales.
For the most part, all three segments remain well-capitalized, and for the majority of companies it would take another crash similar to the financial crisis to put their balance sheets in any serious jeopardy. A.M. Best also notes that these risks can be mitigated through strong risk management practices, including enterprise risk management and stress testing.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=271615.
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