Can insurers’ investment portfolios handle U.S. tariff shock?

Canadian P&C insurers’ investment portfolios generally remain strong and sufficiently well-capitalized to navigate uncertainty around U.S. tariffs, KPMG Canada tells Canadian Underwriter.

“In the short-term, we’re not seeing significant movement in asset mix,” says Chris Cornell, a partner in KPMG Canada’s audit practice and national sector leader for insurance. “Organizations are trying to stay the course.

“I think we have seen them pull back slightly in terms of their exposure to U.S. markets, given the uncertainty from that perspective.”

Cornell was responding to a question on Apr. 15 about how insurers’ investment portfolios are now and what they’re projected to be after tariffs are implemented. The tariff situation has changed multiple times since his interview for a CU podcast on tariffs’ impact on P&C insurance. Most recently, U.S. President Donald Trump raised tariffs on steel and aluminum imports to the U.S. from 25% to 50% effective Wednesday.

Bobby Thompson, another partner in KPMG Canada’s audit practice, points to the role of regulation in the asset mix. He notes the Office of the Superintendent of Financial Institutions already requires an exercise that looks at the duration of P&C insurers’ claims portfolios. Even though the cost mix may change on the claims side, he says, the duration of claims generally is not going to change significantly, and it’s well-matched to the types of assets P&C companies use right now.

“So, we may see changes in severity of claims…” Thompson says. “But…especially in the main bread-and-butter types of asset classes, like corporate bonds, government bonds and the equity portfolios they do have, I wouldn’t expect significant changes or a knee-jerk reaction to a market movement.

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“And the lessons we learned from COVID-19 is a lot of companies did not move those target mixes…because those bread-and-butter assets tend to work over a long macroeconomic cycle, not just short, responsive-type approaches to a situation like this.”

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

More hedging strategies are coming into place to mitigate risks, but they take time to develop, Cornell adds.

Insurers are strategically using derivatives (such as swaps, options and futures based on performance of underlying assets like bonds, stocks or commodities) from both an accounting policy and valuation perspective, he says.

But,Thompson adds, derivatives can be costly to implement for short-term hedges.

“We’re seeing more alternative assets within the portfolio…whether it’s direct lending, real estate investments, mortgage pool assets, those types of things,” Cornell says. “So, insurers are looking to expand the asset classes that they are entering into.

“Part of that is to match up with duration on the liability side. The other part of it is the potential ability to increase yield as interest rates do go down slightly.”

One thing to keep in mind is the risk level associated with asset class diversification. “It can only take a few bogeys on that end to impact your results as you’re thinking it through, either on a quarterly basis or an annual basis.”

Thompson recommends insurers look at the duration of their portfolios and consider how much any short-term expectations are already being priced into the market.

“One trend that we have seen, and this has really been the case for a couple of months now, is there is a divergency and volatility in the bond curve and the swap curve, which means that markets don’t necessarily have a consensus on where we’re going,” Thompson says. “I think taking a look at the structure of the claims and understanding what is backing those really helps to plan for various short-term changes.”

Thompson notes “you can’t just set a derivative and let it ride for several months or several quarters.

“So, constantly going in and refining that hedge and understanding that can be very costly, and I think it’s an administrative burden,” he says. “It goes back to the point – I don’t see a lot of knee-jerk reaction to the way companies are going to change the way they manage their assets or change the way they manage their volatility.

“It’s just going to come down to what programs can you put in place with the tools you’re currently using, which you’re comfortable with.”

Jason Contant

Jason has been an award-winning journalist with Canadian Underwriter for more than a decade, including the past three years as associate editor and, before that, as digital editor for seven years.