Rising rates cause 15% valuation losses in Spanish insurance investments, MAPFRE says

Written by Dan McGrath

20/06/2023

The investment portfolio value of Spanish insurance companies has fallen by 15% as a result of interest rate increases by central banks in 2022, a report by MAPFRE Economics has found.

According to the latest Insurance Industry Global Saving and Investment report, the value of these portfolios fell from €311.3bn in 2021 to €263.2bn at the end of 2022.

The report found that this trend was not limited to Spain. Other developed markets, including Japan, the eurozone, the US, and the UK, as well as emerging markets such as Brazil and Mexico, were also analysed, and the aggregated basis found that these markets had investments valued at €20.7trn in 2022, falling by 5.7% from €21.9trn at the end of 2021.

Despite these results, MAPFRE Economics highlighted that the 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.

Despite the net effect of these two factors on shareholders’ equity in the insurance industry reduced solvency ratios compared to 2022, MAPFRE Economics had said that the industry as a whole has maintained a solid position.

Director of analysis, sectorial research and regulation at MAPFRE Economics, Ricardo González, said: “It must be emphasised 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.

“Unless we see some re-emergence 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.”

Although Spanish insurance companies have not made many changes to portfolio composition in recent years, some can be observed, including the investments in mutual funds rising from 6.5% in 2016 to 12.6% in 2022.

However, the report did mention that despite that increase, the investment weight given to mutual funds by Spanish insurance companies remains below 20.5%, the figure seen on the eurozone as a whole.

On the other hand, direct investment in sovereign bonds continues to be prioritised, although the proportion has fallen by 2.4 percentage points between 2016 and 2022, to arrive at 51.2%. This is the highest proportion of all the markets studied in the report that has its portfolio invested in sovereign debt, with the EU averaging 25.6%.

General manager of MAPFRE Economics, Manuel Aguilera, said: “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.”

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