US insurers have minimal exposure to Silicon Valley Bank bonds and life insurers in particular are “not as vulnerable” as other sectors to a bank run scenario – this is a message by ratings agency AM Best. 

The troubled bank, once a preferred bank for many technology companies, invested heavily in long-dated US government bonds. However, as interest rates rose bond prices fell, lowering the value of SVB’s bond portfolio. SVB did not have enough cash for its needs and started selling some of its bonds at a loss, causing fears among clients. On 10 March, the bank was closed by the California Department of Financial Protection & Innovation.

Sridhar Manyem, senior director, industry research and analytics at AM Best, explained insurers’ exposure to the banking sector extends beyond share price impacts, as many insurers depend on banks for lines of credit, distribution, hedges and other operational aspects.

But he added that life firms are “not as vulnerable to short-term volatility and a run-on-the-bank scenario that we saw with SVB, or banks in general”.

Based on AM Best data, at 2021 year-end, just eight US domiciled insurers had bond exposure to SVB greater than 2% of their capital and surplus – with the maximum being less than 5%.

In the broader bank and trust sector, five insurers had equity exposure greater than their capital position, and 20 had exposure totalling at least half of their capital.

“Examples such as Equitable Life in the UK in 2001, General American in 1999 and Executive Life in 1991 demonstrate that the possibility [of insurer collapse] exists, however remote, and emphasises the importance of enterprise risk management in general, and liquidity risk management in particular,” said Manyem.

“Investment managers are navigating an interest rate environment that has not been seen in decades, and lessons from the past can help insulate from future mistakes. Stress testing and scenario analysis of the impact of rising interest rates on asset-liability management and proactive management of these stresses through strategic actions and capital management would be considered favourably for insurers with interest sensitive exposures.”

Regulators around the world have taken steps to stop contagion risk. 

In the UK, the government and the Bank of England have facilitated a private sale of Silicon Valley Bank UK to HSBC, using powers granted by the Banking Act 2009. 

HSBC’s UK ringfenced subsidiary, HSBC UK Bank, acquired Silicon Valley Bank UK for £1. The assets and liabilities of the parent companies of SVB UK are excluded from the transaction.

In Canada, the Office of the Superintendent of Financial Institutions has taken temporary control of SVB’s Canadian branch. It intends to seek permanent control of its assets and request that the Attorney General of Canada apply for a winding-up order.

SVB operates in Canada as a foreign bank branch based in Toronto. Its business is primarily lending to corporate clients. OSFI said this branch does not hold any commercial or individual deposits in Canada.

In Germany, financial regulator BaFin issued a moratorium to SVB Germany today which bans the bank from making sales and payments “due to the existing risk to the fulfilment of obligations to creditors”. In addition, BaFin ordered the bank to be closed to customers. 

“The moratorium on the Silicon Valley Bank Germany Branch had to be ordered in order to secure the assets in an orderly process… The plight of the Silicon Valley Bank Germany Branch does not pose a threat to financial stability,” said the regulator in a statement in German.

The total assets of the Frankfurt-based bank amounted to €789.2m (£698m), according to BaFin.