Big U.S. Life Insurers Have $1.7B Invested in Regional Banks: Wells Fargo Analysts

What You Need to Know

Life insurers have survived COVID-19.
Investments in regional banks account for a just a small portion of their $8.7 trillion in assets.
One emerging risk: Some buyers will have to replacing expiring debt with new debt.

Seventeen big U.S. life insurers have a total of about $650 million of their $162 billion in statutory surplus invested in the bonds of Silicon Valley Bank and Signature Bank of New York, and about $1 billion invested in the bonds of three other regional regional banks that are facing investor skepticism, according to Elyse Greenspan and other analysts at Wells Fargo Securities.

Greenspan’s team compiled data on life insurers’ regional bank investment exposure in an effort to answer client questions about what kind of impact a series of regional bank failures could have on the life sector.

“Overall exposure feels manageable to us (assuming no further contagion),” the analysts write in their review, which was posted behind a paywall.

Last Thursday, just as news of problems at Silicon Valley Bank was starting to spread, the Wells Fargo team, as well as other companies’ analyst teams, came away from the Association of Insurance and Financial Analysts (AIFA) annual conference with questions about whether weakening real estate prices and decreased borrowers’ need to refinance their debt could possibly start to affect life insurers in the coming year.

What It Means

Analysts may now be looking at information about life insurers’ investments with a higher level of suspicion.

The Backdrop

Silicon Valley Bank appears to have had too high of a percentage of its reserves locked up in bonds, but it began the year by announcing $1.6 billion in net income for 2022 on $212 billion assets. It had high credit ratings, and it said it had access to $14 billion in cash and cash equivalents.

Signature Bank also had solid earnings and high ratings, and it seems to have failed because depositors suddenly became worried about its cryptocurrency operations.

Life Insurers

Life insurers tend to invest heavily in high-rated corporate bonds, as well as assets tied to issuers with high credit ratings. such as loans, mortgages and mortgage-backed securities.

Rising interest rates can cut the fair market value, or resale value, of bonds already in life insurers’ portfolios. But life insurers say they buy and hold most of their bonds to maturity, and that higher rates can help them back newly sold products with new, high-yielding bonds. Annuity issuers, for example, have responded to rising rates by increasing crediting rates.

Nigel Dally and Erica Reynolds, analysts who follow life insurers for Morgan Stanley, attended the recent AIFA conference in Naples, Florida, and came away with a sense of cautious optimism.

“Rising interest rates and dissipating COVID are clear and undisputed positives for the industry,” the analysts wrote in a commentary. “Companies continue to see a meaningful and growing positive impact from higher interest rates. We have also seen the adverse impact of COVID largely dissipate down to an immaterial level … Other positives include still strong fundamentals for group benefits, which benefits from inflation, and no signs of the economic slowdown impacting top-line growth.”