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ECONOMY| 15.06.2023

Rising rates have caused valuation losses of more than 15% for the investments of Spanish insurance companies

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  • A MAPFRE Economics report describes an overall loss of 5.7% for developed and emerging insurance markets.
  • Despite the drop seen in these investment values, the industry has been able to maintain solid levels of solvency.
  • In the portfolios held by Spanish insurance companies, one out of every two euros is invested in sovereign debt.

The interest rate hikes announced by central banks during 2022 have had a strong impact on the investment portfolios of Spanish insurance companies, which were valued at €263.165 billion at the end of the year, compared to €311.315 billion for 2021, representing a drop of 15.46%. This is according to the latest Insurance Industry Global Saving and Investment report produced by MAPFRE Economics and published by Fundación MAPFRE.

This trend was not limited to Spain either, as it was also seen in the rest of the markets analyzed in the report, which include developed markets (Japan, the eurozone, the USA, the UK, and Spain) as well as emerging markets (Brazil and Mexico). On an aggregated basis, those markets had investments valued at €20.715 trillion in 2022, compared to €21.965 trillion at the closing of 2021, representing a 5.7% decrease.

However, MAPFRE Economics also pointed out that this loss of value for insurance company investment portfolios in 2022 was partially offset by the positive effect that the change of cycle for borrowing costs had on valuations for technical provisions, which decreased substantially when the cash flows for forecast liabilities were discounted using higher discount rates.

MAPFRE Economic Research says that although the net effect of those two factors on shareholders’ equity in the insurance industry reduced solvency ratios compared to the previous year, the industry as a whole has maintained a solid position.

“It must be emphasized that high solvency levels and suitable risk management have allowed the insurance industry to absorb these corrections in the financial markets. In general, after a long period of low interest rates, insurance companies had adapted their investment portfolios by reducing maturities in their bond portfolios (which decreases the amount of valuation loss generated by interest rate hikes), while making use of their liabilities to protect their fixed-income investments with longer terms,” explains Ricardo González, Director of Analysis, Sectorial Research and Regulation at MAPFRE Economics.

He also stresses that despite the turbulence caused by recent problems with banks in the USA and Europe, the financial markets got off to a good start this year.

In addition, Mr. González says that “unless we see some reemergence of problems of that type, better performance by equities, a context of higher interest rates, and decreasing inflation can help offset the losses suffered by the insurance industry during the previous year, absorbing some of the impairment in value that may have affected bond portfolios, which can potentially be reversed at the time (still uncertain) when a loosening of monetary policy occurs.”

Portfolio composition

With regard to portfolio composition, Spanish insurance companies have not made many changes during recent years, although there are some that can be observed. For example, their investments in mutual funds have risen by more than six percentage points, from 6.5% of the total in 2016 to 12.6% in 2022.

However, the MAPFRE Economics report also mentions that despite that increase, the investment weight given to mutual funds by Spanish insurance companies remains below the figure of 20.5% seen for the eurozone as a whole.

On the other hand, direct investment in sovereign bonds continues to be prioritized, although this proportion has fallen by 2.4 percentage points between 2016 and 2022, to arrive at 51.2% at the closing of 2022. Out of all of the markets studied by MAPFRE Economic Research, the Spanish market has the highest proportion of its portfolio invested in sovereign debt, with a percentage of 51.2% at the closing of 2022, which is double the EU average of 25.6%.

“This priority position given to fixed-income securities can be largely explained by the fact that the business model for insurance brings with it a need to implement liability-driven investment strategies, in order to achieve an appropriate match, in terms of maturities and interest rates, between the liabilities taken on and the investment instruments that back them up,” explains Manuel Aguilera, General Manager of MAPFRE Economics.

This would also explain the low levels of variation seen among the various types of assets, although MAPFRE Economics also stresses in its report that “it is not unusual for rotations to occur, especially in relation to maturities, to anticipate changes to market interest rates and central bank benchmark rates, or to see adjustments made to weights based on ratings.”

At the international level, the United States shows the highest levels of investment in corporate bonds, compared to those seen in the rest of the developed insurance markets discussed in the report. Overall, insurance companies significantly increased their reliance upon this asset type during 2022, with those investments reaching a proportion of 47.5% compared to 40.9% for the previous year.

The Japanese insurance market, meanwhile, has a high percentage of investments in foreign currencies, which are included in the “Other Investments” category. In 2022, those investments dropped by 2.6 percentage points compared to 2021, to now represent 29.5% of the total portfolio.