Given the declining investment yields of the past decade, US property and casualty reinsurers’ investment allocations during this period have shifted to more riskier assets such as lower-rated and private placement bonds.
According to AM Best, that bonds remain the foundation of P&C insurers’ investment portfolios, but allocations have been declining.
In 2014, 62.2% of the industry’s total invested assets were bonds, a report from the rating agency observes, but, by 2021, this amount had decreased to 53.8%.
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.
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 companiesHelen Andersen, industry analyst, AM Best
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.
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.
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
However, it also acknowledged that, for most carriers, this concern is mitigated by more-than-sufficient levels of risk-adjusted capitalization and liquidity.