Given the decline in investment returns over the past decade, U.S. P&C reinsurers’ investment allocations over this period have shifted to riskier assets such as private placement and lower-rated bonds, according to AM Best.
AM Best notes that bonds remain the foundation of P&C insurers’ investment portfolios, but allocations have declined.
In 2014, 62.2% of the industry’s total invested assets were in bonds, observes a report by the rating agency, but by 2021 that amount had fallen to 53.8%.
Additionally, the proportion of NAIC-2 bonds has increased from 11.5% over the past 10 years to 17.6%, with more than 40% of P&C insurers having increased their NAIC-2 bond allocations since then. 2014.
AM Best’s data also highlights that about 15% of the property and casualty insurance industry’s bond portfolio matures within the next year.
“As interest rates rise with the recent Fed hikes, the coupons of current bond holdings are becoming less attractive by comparison, affecting prices and pushing market values of current holdings lower for reporting companies. to GAAP,” said industry analyst Helen Andersen. , AM Best.
“However, a shorter-term liability portfolio leads to a shorter-duration investment portfolio, which limits the impact on P&C insurers’ bond portfolios.”
P&C insurers have also poured more and more new money into private placement bonds – the industry has more than doubled its allocation since 2012, from 9.3% to 20.3%, with a sharp increase in 2021.
And holdings of secured loan obligations (CLOs) and secured debt obligations (CDOs) also increased, from $10.1 billion in 2016 to $46.6 billion in 2021.
“Increasing exposure to several riskier asset classes such as fixed income securities and lower-rated private placements leads to greater potential for losses and pressure on capital,” AM Best warned.
However, he also acknowledged that, for most carriers, this concern is mitigated by more than adequate levels of risk-adjusted capitalization and liquidity.