Chart of the Month (March 2023)

Chart Provided by FACTSET_®

Chart Description

• The chart above shows the quarterly book value for an index of large U.S. insurance companies.
• Book value is derived by subtracting the balance sheet value of a company’s liabilities from the balance sheet value of a company’s assets.
• In Dec 2021, the value of the US Insurance company book value index was 74.29.
• Twelve months later, in December of 2022, the index book value had fallen by over 37% to 46.52.

Our take

This chart provides clear evidence that banks are not the only financial institutions that are feeling severe pressure as a result of the Federal Reserve’s interest rate policies.  While it is easy to point fingers and blame the management teams of the banks that have been in the news recently (we would agree with much of that criticism), the bigger issue is the environment that the Federal Reserve has forced all large financial institutions into as a result of their policy of artificially low interest rates for a period of over 13 years.  This policy forced banks, insurance companies and many other large institutional investors, such as pension plans, endowments, and mutual funds, to “reach for yield” as they attempted to earn the same type of returns that they have historically received from lower risk, vanilla type bond investments.  While it is impossible to predict how this will all play out, there is one result that we remain confident in, and that is that the federal government (Federal Reserve, Treasury, FDIC, and others) will be compelled to intervene in a much larger way.  Ultimately, this will require spending money that we don’t have.  The one positive that most analysts and economists on TV have gleaned from the banking turmoil in recent weeks is that at least the inflation problem has been solved.  We’re not so sure.  We believe we’re simply in the eye of the inflation storm.

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