We live in uncertain times. President Donald Trump’s ‘America First’ economic policy, while boosting the US economy has caused controversy overseas.
Trade tariffs impact industry sectors in different ways. For example, the Trump administration’s duty hikes on steel and aluminum imports will have a positive impact on US-domiciled metal producers. However, for metal consumers further down the production line, the tariffs might not be as positive because prices and credit risks could potentially go up.
For US-domiciled insurance companies, the impact of the trade tariff war will be felt through sector allocations in their portfolios. Certain sectors, such as agriculture or retail, are likely to feel the effects of trade uncertainty more keenly, which could lead to a rebalancing of insurance portfolios in those areas.
“A big question for many industries, including insurance, is whether trade uncertainty will stunt economic growth. Every job created and household formed brings with it a number of risks that have to be insured. The insurance business is strong when the economy is strong, but if trade concerns drag down potential growth, that could result in lost interest for insurers,” said Richard Sega, global chief investment strategist at Conning.
There has been some concern about potential economic inflation as a result of increased tariffs and their impact on costs throughout the global supply chain. Sega agrees there may be some general inflation in the US, but attributes it to increased monetary velocity as a result of US tax reforms rather than a direct effect of Trump’s trade policies. Regardless of its cause, economic inflation will have an impact on insurance firms.
“Certain kinds of fixed-benefit coverages, like life insurance or disability insurance policies, are relatively unaffected by inflation on the liability side. The impact on their asset portfolio is more concerning, especially if inflation effects the valuation of their equities and interest rates on bonds and so on,” Sega told Insurance Business.
“Property and casualty (P&C) writers face a different kind of problem,” he added. “Economic inflation tends to lead to an increase in the severity and frequency of claims, with more surpassing the attachment point or deductible level. That’s an unhedgeable risk from an insurance company’s portfolio standpoint. It has to be handled through pricing, which is a real challenge for P&C insurance firms when they’re faced with an inflationary period.”
Trade protectionism and market volitivity also presents opportunities for fundamental investors, like Conning, to upgrade the portfolios and credit strength of high-quality companies, Sega explained. Picking at opportunities through times of trouble, sets companies in a good position to take on risk once issues are resolved.
During these uncertain times, Conning has turned to diversification when investing, looking at asset classes beyond corporate credit, which is most popular with the insurance industry. The firm is eyeing investment opportunities in structured product, commercial mortgage loans, and asset-backed securities, all of which bring some yield but don’t threaten corporate credit exposure.
“If the worst-case scenario plays out and there’s an all-out spiral of retaliatory tariffs, there’s no putting a happy face on it,” Sega added. “Emerging markets with export-based economies would probably get hurt the most, as opposed to the US where domestic policies of late have been very positive. Even with a trade drag, I believe the US economy will still do fairly well – just not nearly as well as it could do without all of these trade frictions.
“I believe President Trump wants to put a trade deal together that he can point to as a success, and, in order to do that, people on the other side have to be able to point to successes too. My expectation is that we will get a negotiated solution to the trade uncertainties out there, and when that happens, it could be very positive for the markets.”