Growth in the US insurance industry’s exposure to bonds with NAIC 2 designations stabilises

Written by Adam Cadle

20/11/2020

Following gradual annual increases over the last decade, US insurers’ exposure to NAIC-2 designated bonds as a percentage of total bonds was unchanged at 30% at year-end 2019 compared to year-end 2018, latest figures published by the NAIC have shown.

The increase in US insurers’ bonds with NAIC 2 designations over the last 10 years reflects a reach for yield by the US insurance industry at the expense of credit quality in the lower-for-longer interest rate environment, as well as the growing share of BBB-rated bonds in the overall corporate bond market.

US insurers increased their book/adjusted carrying value (BACV) dollar exposure to NAIC 2– designated bonds 3.6% to $1.32trn at year-end 2019 from $1.28trn at year-end 2018. While no significant concentrations are evident at the lower end of the ‘BBB’ rating category for the US insurance industry, year-end 2019 data exhibited an increase in the share of BBB- credit quality category to 30% from 28% at year-end 2018, reflecting a year-over-year (YOY) deterioration in credit quality.

Amid the COVID-19 pandemic, the number of fallen angels, or companies downgraded in 2020 from investment grade (particularly in the ‘BBB’ rating category) to speculative grade, as of October exceeded that during the financial crisis. The NAIC Capital Markets Bureau (CMB) estimated that the US insurance industry’s exposure to the largest corporate fallen angels was less than 1% of total NAIC 2 bond exposure at year-end 2019.

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