Commentary: Does Market Volatility Hurt Berkshire’s Insurance Business?

(BRK.A), (BRK.B)

Does the return of market volatility hurt Berkshire Hathaway’s insurance business?

Ratings agency A.M. Best thinks so.

In A.M. Best’s report. “Rising Volatility: Negative Implications for Insurers,” they note that equity market volatility historically has had severe negative implications for life insurers whose assets and liabilities correlate strongly with equity prices.

However, they note that de-risking in the form of decreased exposure to annuities, and new products such as managed volatility funds, have dampened the sensitivity.

The rating agency states that equity market volatility has been elevated since the spike in early February 2018, and with the announcement of steel and aluminum tariffs, the stock market will most likely experience more volatility than last year.

The VIX, dubbed the stock market’s “fear gauge,” was low throughout 2017 and touched an all-time low of 9.14 in November. It spiked to 37.32 on February 5, 2018. In comparison, its peak in 2017 was only 15.96.

A.M. Best views prolonged rising stock market volatility as a credit negative for U.S. insurers with significant equity exposure; in particular, stock market leverage for the property/casualty segment has crept up since the most-recent financial crisis and life insurers are still sensitive to equity markets though they have employed mechanisms to de-risk.

For property/casualty and health insurers, the sensitivity to the equity markets is proportional to their equity holdings in general and equity holdings leverage.

Best also notes that although changes in equity values affect the capital and surplus of all sectors, only the life/annuities segment sells products that are tied to the equity markets.

They do say that steps variable annuity writers took to de-risk their products since the late-2000s have proven effective in limiting earnings volatility; however, the de-risking measures, along with the increased investment fees associated with managed volatility funds, have made newer variable annuity products less attractive to consumers and is one reason among many other reasons that have caused a decline in sales.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.