Our investment return comes from interest on short-term bank deposits. There is no equity portfolio, no property, and no credit book on the asset side — a decision that suits an undertaking of this size and this line of business, and one that makes the effect of a rate cycle unusually easy to read.
The part that surprises people is that a rate cycle shows up in the capital requirement as much as in the return. Interest rate and concentration exposure on a deposit portfolio is capital-consuming under the standard formula, and how much it consumes depends on how long the deposits are. Between the 2023 and 2024 reporting periods our market risk module fell from £4.38m to £2.32m as the portfolio shortened. Nothing about the underwriting changed; the capital requirement fell by roughly two million pounds anyway.
That is the trade-off in the open. A longer deposit book earns more and locks in a rate, at the cost of more capital held against interest rate movement and, if it is concentrated in a small number of counterparties, against concentration. A shorter book earns less and re-prices with the market, which is uncomfortable when rates are falling and cheap in capital terms.
For a surety writer there is a second reason to keep the asset side dull. A guarantee book is a contingent liability that crystallises in bad years, and bad years for our applicants tend to be bad years for asset prices too. Holding the float in instruments that would fall in value at exactly the moment claims arrive is a correlation nobody needs. Boring assets are part of the underwriting proposition rather than a failure of ambition on the investment side.
None of this is a forecast, and we do not publish a view on where rates are going. It is an explanation of why our own numbers move the way they do, so that a reader looking at a cover ratio has some idea which lever pulled it.
Written by the underwriting team at FDI Insurance d.a.c., Dublin. This piece is general information, not advice on any particular transaction — and it is not an offer of insurance.
