The U.S. insurance industry’s high-yield bond exposure of almost $300 billion at year-end 2021 is the highest BACV reported over the last decade. (See Chart 2.) From 2012 to 2021 , high-yield bond exposure increased approximately 42% while total bond exposure grew approximately 34% as insurance companies sought higher relative yields offered by high-yield bonds, among other asset classes, amid the low interest rate environment of the past decade. In addition, most recently, credit quality deterioration from the impact of the COVID-19 pandemic resulted in some migration of the industry’s investment grade bond exposure into high-yield territory, particularly in 2020.
On a percentage basis, high-yield exposure accounted for 6% of total bonds at year-end 2021, the second highest point over the 10 years ending 2021. While exposure declined modestly from 6.1% at year-end 2020, as a percentage of total bonds, it remains elevated relative to the last 10 years. The most recent period when U.S. insurers’ high-yield-bond exposure exceeded 6% of total bonds was in 2009 during the financial crisis when it reached 6.3%
Author(s): Michele Wong
Publication Date: 13 Oct 2022
Publication Site: NAIC Capital Markets Special Report
An active year for mergers and acquisitions in 2021 and large block reinsurance transactions led to a 41% increase in admitted assets owned by private equity firms in 2021, according to a new AM Best special report.
In its Best’s Special Report, “Private Equity Continues to Make Inroads in Insurance Industry,” AM Best states that as life/annuity insurers’ earnings have been pressured, with capital that has been strained due to reserve adjustments, insurers’ willingness to divest businesses has been bolstered; private equity firms have been eager to step in. With the year-over-year increase in admitted assets to $849.6 billion, private equity insurers now have a 10% share of the U.S. life/annuity’s total assets, more than double the share from five years ago.
“More-experienced private equity firms have gotten comfortable managing insurance assets while adhering to constraints imposed on their portfolios, such as regulatory compliance and rating agency capital charges on asset and liability risks, ALM matching requirements and liquidity concerns,” said Jason Hopper, associate director, industry research and analytics. “As these firms take advantage of the more-permanent capital and premium flows afforded them through ownership of an insurer, there is less of a need to look for a quick exit from their investment.”
The report notes that private equity firms have entered the insurance market in one of two ways: by controlling an insurer through an equity investment and buying or reinsuring blocks of business from other insurers, while influencing the insurer’s investment management strategies to earn higher yields; or by working with insurers as a partnership or outsourced chief-investment officer, whereby the private equity firm manages a portion of the insurer’s assets for a fee.
Even with their more diversified bond portfolios, less than a third of private equity insurers have exposures to below-investment-grade bonds greater than the industry average of 5.9%, according to the report. The investing strategies of private equity insurers have helped them consistently generate a higher net yield since 2017, and most continued to outperform the individual annuity writers’ composite in 2021. The competitive pricing private equity insurers can offer puts more pressure on traditional insurers that lack the same scale with more-conservative crediting rates.
U.S. insurers’ exposure to CLOs increased significantly over the last few years, as they have represented an attractive alternative investment with higher yields than traditional investments. As of year-end 2021, U.S. insurers’ exposure to CLOs collateralized predominantly by leveraged bank loans and middle market loans increased by 12% to $216.3 billion in BACV from $192.9 billion at year-end 2020 and $156.9 billion at year-end 2019 (see Chart 1). However, the pace of growth has slowed from 23% and 28% at year-end 2020 and year-end 2019, respectively.
Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus
A new set of revisions to the National Association of Insurance Commissioners requirements that govern real estate investments on the part of life insurers could be teeing up the asset class for growth in the future, as barriers to entry are lowered.
Late last year, the NAIC released a set of changes to its risk-based capital requirements that, for life insurers, lowered the factor for life and health companies. For so-called Schedule A investments—properties owned outright by carriers—the required set-aside was lowered to 11% from 15%. In the case of Schedule BA investments, such as partnerships and funds where the carrier isn’t the sole owner, that figure went down to 13% from 23%.
George Hansen, senior industry research analyst, AM Best, said life insurers traditionally have only placed about 6% of their portfolios in Schedule BA real estate products and less than 1% in Schedule A real estate investments. Whether there’s any increase and by how much will likely be tied to which segments of the industry carriers are in, but Hansen said he doesn’t expect a huge increase.
U.S. insurers’ exposure to bank loans increased by about 32% to $97.2 billion in book/adjusted carrying value (BACV) at year-end 2021, from $73.9 billion at year-end 2020; they make up less than 2% of the industry’s total cash and invested assets. About 80% of U.S. insurers’ bank loans were acquired in market transactions; the remainder was issued by the reporting entities. About 74% of bank loans were held by large life companies, or those with more than $10 billion in assets under management; 10 life insurance companies accounted for 54% of U.S. insurers’ total bank loan exposure at year-end 2021. There was a small improvement in credit quality of U.S. insurer bank loans, with those carrying NAIC 3 and NAIC 4 designations—i.e., BB and B credit rating categories—accounting for 53% of the total at year-end 2021, compared to 57% at year-end 2020. Bank loans carrying CCC credit ratings also decreased year-over-year (YOY) to 8% from 12%. New leveraged loan market issuance in 2021 reached $615 billion, surpassing a previous record set in 2017 of $503 billion, with collateralized loan obligations (CLOs) for the most part driving demand.
Author(s): Jennifer Johnson, Jean-Baptiste Carelus
Publication Date: 1 June 2022
Publication Site: NAIC Capital Markets Special Report
Table 1 identifies the year-end 2020 bond, common stock and preferred stock exposure of the U.S. insurance industry to oil and gas companies. The industry’s $111 billion book/adjusted carrying value (BACV) exposure represented approximately 1.5% of the industry’s total cash and invested assets as of year-end 2020. Oil and gas companies will benefit from the rise in oil prices, and they are currently in a much better financial position than during 2020 when Brent crude prices briefly fell below $10 per barrel and remained depressed relative to historical levels due to lower demand resulting from the effects of the COVID-19 pandemic.
Author(s): Michele Wong, Jennifer Johnson and Jean-Baptiste Carelus