US insurance industry’s cash and invested assets increase by 7.7% to $7.5trn

Written by Adam Cadle

13/05/2021

The US insurance industry reported $7.5trn in total cash and invested assets at year-end 2020, an increase of 7.7% compared to year-end 2019.

According to latest figures published by National Association of Insurance Commissioners (NAIC), the composition of the industry’s assets was unchanged from prior years, with bonds (62.6%) and common stocks (13.2%) the largest and second largest asset classes, respectively. Mortgages formed 8.3% of total cash and invested assets.

Life companies hold the largest share, or 65.3%, of the industry’s total cash and invested assets in 2020, while P&C companies account for 30.5%.

The share of bonds in the US insurance industry’s portfolio at year-end 2020 declined to 62.6% from 63.8% at year-end 2019 as the low interest environment persists and insurers continue to be challenged with finding attractive yields in the fixed income market. Cash and short-term investments increased to 4.9% of total cash and invested assets as of year-end 2020 from 4.1% as of year-end 2019.

As the COVID-19 pandemic created uncertainty with respect to business prospects and the financial markets alike, insurance companies have enhanced their balance sheet liquidity with larger cash balances. US insurers reported cash and short-term investments of $367bn at year-end 2020, an increase of 27% compared to year-end 2019.

US insurance companies continue to seek more attractive and higher yields in relatively illiquid investments, such as mortgage loans, private equity and hedge funds in the prolonged low interest rate environment. While the share of Schedule BA assets in the industry’s portfolio increased to 6.1% at year-end 2020 from 5.8% at year-end 2019, the share of mortgages declined to 8.3% from 8.6%. However, US insurers’ exposure as measured in terms of BACV to these two asset classes continues to increase, with mortgage exposure increasing 4% YOY to $626bn and Schedule BA exposure increasing over 13% YOY to $456bn.

Growth in Schedule BA assets, including affiliated and unaffiliated, held by US insurance companies accelerated to more than 13% at year-end 2020. Last year marked the second year in a row that Schedule BA assets grew more than 10% on a YOY basis. The annual growth in Schedule BA exposure has generally exceeded the annual growth of total cash and invested assets since 2011; the only exception during the time period analysed was in 2015. Despite significant growth over the years, Schedule BA assets do not represent a significant, or core, investment for US insurers, representing only 6% of total cash and invested assets. The largest asset classes reported on Schedule BA include private equity, hedge funds and real estate.

The US insurance industry’s exposure to bonds increased 5.6% at year-end 2020 compared to year-end 2019, reaching $4.7trn. Corporate bonds and municipal bonds remained the two largest bond types for US insurers, representing 56.2% and 10.9%, respectively, of total bond exposure. Asset-backed securities (ABS) and other structured securities, US government bonds, and agency-backed residential mortgage-backed securities (RMBS) accounted for 9.7%, 6% and 5.8% of total bond exposure, respectively. The share of corporate bonds and ABS and other structured securities increased YOY, while the share of municipal bonds, US government and agency-backed RMBS declined. Record levels of corporate bond issuance, both by investment grade and high-yield issuers, in 2020 likely contributed, in part, to the one percentage point YOY increase in US insurers’ corporate bond exposure, to 56.2% of total bonds.

Within the bond portfolio, insurance companies looked to ABS and other structured securities and bank loans for additional yield. In addition to consumer ABS, ABS and other structured securities include collateralized loan obligations (CLOs), commercial ABS, lease-backed securities and other types of structured finance investments. In terms of BACV, exposure to ABS and other structured securities has increased double digits on a percentage basis in at least the last two years. Although exposure to bank loans and exchange-traded funds (ETFs) is minimal as a percent of total bonds, exposure in terms of BACV increased significantly—by 13% and 71%, respectively, in 2020 compared to 2019—and follows increases of 17% for each in the prior year. Following two years of significant growth, bond mutual fund exposure declined almost 8% to $823m at year-end 2020.

The credit quality of the US insurance industry’s bond portfolio deteriorated as of year-end 2020, with bonds designated NAIC 1 and NAIC 2 declining one percentage point to 93.9% of total bond exposure and a small shift in exposure toward the lower end of the higher quality spectrum.

Bond investment portfolios experienced credit quality deterioration following record levels of negative rating actions at nationally recognised statistical rating organisations (NRSROs) in 2020 following the impact of the COVID-19 pandemic on the credit markets.

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