What bond selloffs mean for insurer investment portfolios and hard markets

Roiling investment markets – including last week’s U.S. Treasury bond fire sale – triggered by the White House’s on-again, off-again imposition of sweeping global tariffs will almost certainly impact insurance company investment portfolios, industry sources tell Canadian Underwriter.

“With the tariffs influencing the stock market, their [return on] investment profit may drop,” says Jake Hovinga, commercial lines manager at Mitch Insurance. “So they would have to highly rely on underwriting profit to keep their insurance company profitable. It may harden the market again, meaning it’s driving up premiums again and prompting insurers to adopt a more selective appetite for certain classes of business.”

At this point, tariffs can be expected to cause a serious pullback from insurance companies’ willingness to deploy capital into many classes of business that are impacted, says Andrew Mathias, managing director and partner of KPMG Corporate Finance, the firm’s investment banking group.

He adds it’s realistic to assume all business classes will be impacted in one way or another.

“An example is residential construction coverage, or even just habitational property, the replacement value on these builds has just gone up materially,” he tells CU. “If I’m an insurer, I don’t know the cost to replace a property fully and can’t have my premiums be materially low such that I’m having to dip into my reserves significantly, as those are typically held back for NatCats.”

Related: How insurance company investments will respond to the trade war

Bond bust

Normally, a drop in stock prices spurs investors to snap up fixed income investments – with 10- and 30-year U.S. Treasury bonds a particular favourite. And when stocks rise, fixed income instruments will normally dip.

But that normal yin-yang relationship isn’t in place today because the underlying factor behind investor worry is government policy. “Thus, investors also pull back in government bonds and T-bills, causing those to plummet too,” Mathias says.

“The other contributing factor is those large institutions, such as hedge funds, had a number of margin calls in recent weeks – the largest on record since COVID-19. To satisfy their positions, they had to free up cash which meant selling off bonds, further exacerbating the fall of the fixed income markets,” he adds.  

“It’s a little bit unprecedented in recent times, and similar to what we saw during the pandemic. The difference is, [this time] it’s purposely driven by policy.”

How does that impact insurers? On its face, Mathias notes, it’s more worrying than pure equities market drops, but he adds conversations he had with carriers last week contain some hope.

“Their view is that this level of volatility will equalize in the long run – which is their investment horizon, versus short term. The issue would be if there was a structural correction that kept the markets down plus-50%, then investment portfolios would suffer,” he explains. 

Portfolio problems

When it comes to investment impacts, Mathias tells CU insurers’ stock and investment portfolios will take a hit, but that it will be less severe than what’s being experienced by individual investors.

He notes the Office of the Superintendent of Financial Institutions (OSFI) has rules governing Federally Regulated Insurers in Canada. Among other things, the rules require insurers not to be overinvested in any one specific asset to protect the insurer from market downturns. OSFI also requires insurers to maintain minimal capital amounts (also known as the Minimum Capital Test) to ensure they’re able to pay customers’ claims.

Those requirements lead insurers to stick with longer-term fixed income products such as government and corporate bonds. Life insurers, meanwhile, are particularly prone to staying with bonds and related investments such as real estate and mortgages.

“For P&C insurers, while the need for capital is greater and in shorter duration compared to life [insurance], the make-up of their portfolios is still the same, with fixed income comprising a similar make-up as life – roughly 50%,” says Mathias.

“The difference here is that P&C will likely invest in more flexible products with lower yield but that allow for faster liquidity compared to higher-yield corporate bonds.”

While these financial impacts will hit insurers, “and could be used to prime for [a] hard market, driving rate higher…the bigger driver of rate in this case is the uncertainty with pricing policies given the impact tariffs have on particular coverage [and] lines,” Mathias says.