Insurance companies had the best return on assets in 10 years in 2020, despite last year’s volatility and persistently low interest rates, according to a report by the National Association of Insurance Commissioners.
Carriers realized 7.7% of their cash and invested assets in 2020 year over year, totaling $ 7.5 trillion, in addition to a 7% banner they achieved in 2019, according to a special report from the NAIC.
But this good news also came with the observation that insurers have chosen lower quality investments in search of higher returns.
Carriers reduced their holdings of Class A bonds (NAIC 1) to 62% from 65% of holdings. At the same time, they increased B-grade bonds (NAIC 2) to 32%, from 30%, while increasing their lower-grade bonds (NAIC 3) to 4%, from 3%.
Many riskier bonds, such as BBB rated bonds included in the NAIC 2, were downgraded to speculative or “fallen angel” status in 2020 due to business disruptions. The past year has seen a record number of corporate bond downgrades, especially following the drop in oil prices earlier in the year.
The authors of the NAIC report said the increase in substandard investments may reflect the record number of downgrades last year, but downplayed exposure to risk.
“Although there was strong concern that a large amount of fallen angel debt could lead to a serious dislocation of the market, the number of fallen angels was lower than the highs of previous years, including the financial crisis,” according to The report. “In 2020, the market was able to absorb the additional high yield debt with limited price volatility or illiquidity, in part due to central bank liquidity programs that supported recent fallen angel debt.”
Carry increased its cash and short-term investments by 27% in 2020 in response to the uncertain operating environment resulting from the COVID-19 pandemic.
Life insurance companies held a large majority of the assets, 65.3% of the total; damage monitoring, 30.5%; health, 4%; and titer 0.4%.
Bonds accounted for 63.6% of all assets, followed by common stocks at 13.2%, mortgages at 8.6%, with the remainder spread across eight categories. The authors of the report noted that carriers continue to seek a liquidity gain in investments such as private equity and hedge funds in the prolonged low interest rate environment.
“Although these asset classes generally offer higher yields than government company bonds, they are generally less liquid and have less credit and price transparency,” according to the report. “As such, they are subject to greater price volatility.”
One illiquid investment that carriers cut back was real estate, which continues to suffer in the commercial sector as the residential market booms.
“The rate of growth in mortgage exposure slowed in 2020 compared to annual growth of more than 8% from 2016 to 2019,” according to the report. In addition, 2020 marks the first year that annual growth in mortgage exposure has not exceeded annual growth in total cash and invested assets since the NAIC Capital Markets Bureau began tracking data in 2010. “
The authors noted the trend towards lower quality investments, but attributed part of this trend to the abnormal year.
“While the investment portfolio in corporate bonds in the US insurance industry consists primarily of high credit quality companies, which have greater financial flexibility to withstand the negative credit effects of macroeconomic shocks “, according to the report,” the deterioration in credit quality was nonetheless evident during the bond portfolio year at the end of 2020 given the widespread economic and credit impact of the COVID-19 pandemic. “
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has over 25 years of experience as a journalist and editor for newspapers and magazines. He was also vice president of communications for an association of insurance agents. Steve can be reached at [email protected]
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