Best’s Special Report: Declining Yields Leading to U.S. Property/Casualty Insurers Increasing Investments in Riskier Assets

OLDWICK, N.J.--(BUSINESS WIRE)--Given the declining investment yields of the past decade, U.S. property/casualty insurers’ investment allocations during this period have shifted to more riskier assets such as lower-rated and private placement bonds, according to a new AM Best report.

In its Best’s Special Report, “Declining Yields Leading to Investments in Riskier Assets,” AM Best states that bonds remain the foundation of property/casualty insurers’ investment portfolios, but allocations have been declining. In 2014, 62.2% of the industry’s total invested assets were bonds; by 2021, this amount had decreased to 53.8%. In addition, the proportion of NAIC-2 class bonds has risen to 17.6% from 11.5% in the past 10 years, with more than 40% of property/casualty insurers increasing their NAIC-2 bond allocations since 2014.

The report also notes that approximately 15% of the property/casualty industry’s bond portfolio is maturing within the next year. “As interest rates rise with the Fed’s recent hikes, the coupons of current bond holdings become less attractive by comparison, affecting price and pushing the mark-to-market values of current holdings lower for GAAP filing companies,” said Helen Andersen, industry analyst, AM Best. “However, a shorter-term liability portfolio leads to a shorter-duration investment portfolio, limiting the impact to bond portfolios for property/casualty insurers.”

Property/casualty carriers also have increasingly invested new money in private placement bonds—the industry has more than doubled its allocation since 2012, to 20.3% from 9.3%, with a large increase in 2021. Larger companies generally invest more heavily in private placements, as they require more due diligence than government or public corporate bonds, and smaller insurers may lack the scale to invest or investing expertise. Somewhat easing the negative liquidity effects that come with investing in private placements, the property/casualty industry has focused on 144a investments, a subset of private placements with more favorable liquidity as they can be sold on the secondary market to qualified institutional buyers. Holdings in collateralized loan obligations (CLO) and collateralized debt obligations (CDO) have spiked as well, to $46.6 billion in 2021 from $10.1 in 2016. These holdings are concentrated in a minority of insurers, as only about 17% of the property/casualty industry hold CLOs/CDOs.

Growing exposure to multiple, riskier asset classes such as lower-rated fixed income and private placements leads to greater potential for losses and pressure on capital. For most carriers, this concern is mitigated by more-than-sufficient levels of risk-adjusted capitalization and liquidity. AM Best will continue to monitor the asset allocations of property/casualty insurance companies and evaluate the impact on their balance sheets and their overall risk management.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=325583.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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