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
While U.S. insurance companies have adapted to investing in a world of low interest rates, they are now also facing the challenge of investing in a high inflationary environment whereby yields may not be providing adequate returns on investment on an inflation-adjusted basis. Using a similar approach to estimating real interest rates in Chart 1, we estimate how corporate bond yields are holding up against high inflation
Graph 3 shows similar data for BBB-rated corporate bonds. With BBB yields generally higher than A yields, the difference between the two measures has been negative for a shorter period of time. Real yields did not turn negative until May 2021, and they dipped to almost -1% in December 2021.
Author(s): Michele Wong and Jennifer Johnson
Publication Date: 15 Feb 2022
Publication Site: NAIC Capital Markets Bureau Hot Spot