Global insurance market report [gimar]

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Figure 3.2h:
Projected corporate bond portfolio returns (%)
Source: BMA

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150 basis points shift upwards for the risk-free 
yield curve. This is an extreme scenario given that 
the 90th percentile yearly increase in the federal
funds rate has been around 127 basis points 
since 2000.
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These results are driven by the short durations 
of assets held by (re)insurers in Bermuda. These 
firms, which are mostly active in the property and 
casualty space, have liabilities of short duration 
and therefore require short duration assets to 
match. In addition to sovereign bonds, (re)insurers 
are also active buyers of corporate bonds. As 
was done in the previous exercise, the shocks 
for corporate bonds’ different rating classes are 
applied, assuming constant credit spreads.
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The 
results can be found in Figure 3.2h.
As with the sovereign bond portfolio, the mean 
and median curve have very little revaluation 
effects on the corporate bond portfolios of
(re)insurers for all rating classes. The 95th 
percentile curve produces losses between 
2% and 5% on average. 
However, there are outliers 
because some companies 
have long duration corporate 
bonds to match liabilities in 
the casualty business, and 
some may be conducting 
life business as well. Overall, 
the revaluation effects are 
different between rating 
classes, as specific
(re)insurers prefer certain 
durations for specific rating 
classes. From the above 
example, AA and BBB-rated 
securities are preferred
by a few longer-term
(re)insurers. The impact 
of the portfolio’s revaluation on the companies’ 
solvency was estimated using a rough measure 
of the probability that assets would be lower in 
value than liabilities. For all companies that were 
stressed, this probability was estimated to be zero.
Although it is a rather crude measure, the 
results of the exercise show that, on average, 
the revaluation effects are manageable after a 
sudden increase in interest rates in the Bermudan 
property and casualty sector, although some 
outliers may need extra supervisory attention. 
Although at higher interest rates there are 
revaluation effects and fixed-income portfolios 
lose value, as the older bonds mature and
(re)insurers purchase new ones with higher 
coupon rates, their investment income would 
improve and the revaluation effect would be a 
temporary strain that does not significantly affect 
the longer-term survival of the firm. Of course,
this is more relevant for property and casualty
(re)insurers that do not have to lock in bonds for 
long durations.