US insurers’ cash and invested assets rise by 6.9% to $7trn

Written by Adam Cadle

03/07/2020

US insurers’ cash and invested assets reached $6.99trn at year-end 2019, an increase of 6.9% to year-end 2018.

According to a Capital Markets Special Report published by the National Association of Insurance Commissioners (NAIC), bonds continue to be the largest component, representing 63.7% of total cash and invested assets at year-end 2019. Common stock investments were the second largest holding for the industry at 13.2% of total cash and invested assets, following by mortgages at 8.6% and Schedule BA assets at 5.8%.

Life companies continue to hold the largest share, or 65.6%, of the industry’s total cash and invested assets in 2019, while P&C companies accounted for 30.7%. Despite the relative stability of the mix of assets, the share of bonds in the industry’s portfolio at year-end 2019 declined marginally to 63.7% from 65.7% at year-end 2018, while the share of common stocks increased to 13.2% from 12%. The common stock share increase can be attributed, in part, to the strong performance of the equity markets whereby the S&P 500 Index (S&P 500) experienced an annual increase of around 30% in 2019. On a BACV basis, the industry’s exposure to common stock increased by 18% at year-end 2019 compared to year-end 2018, with P&C companies’ BACV exposure increasing by more than 21% YOY.

Although the share of mortgages and Schedule BA assets in the industry’s portfolio at year-end 2019 is relatively unchanged from the prior year, US insurers’ exposure as measured in terms of BACV to these two asset classes continues to increase. However, the share of mortgages and Schedule BA assets has increased to more than 14% of cash and invested assets as of year-end 2019 from under 11% at year-end 2010. With interest rates at very low levels for a number of years running, US insurance companies have been seeking more attractive and higher yields in relatively illiquid investments, such as mortgage loans, private equity and hedge funds (the latter two are assets reported on Schedule BA). “Although these asset classes generally offer higher yields than public corporate bonds, they are typically less liquid, have less credit and pricing transparency, and as such, are subject to greater price volatility,” the report said.

The US insurance industry’s total exposure to mortgages was $602bn at year-end 2019, an increase of 8.5% compared to year-end 2018. The pace of annual increases in mortgage exposure has slowed to below 9%, as compared to 9.5% in 2018, 9.1% in 2017 and 10.7% in 2016. However, the annual growth in mortgage loan exposure has exceeded the annual growth of cash and invested assets since 2011. Furthermore, over the last 10 years, the industry’s exposure to mortgages has almost doubled, increasing by approximately 90% from 2010 to 2019.

Life insurance companies hold approximately 96% of the industry’s mortgages, as they match well with the long-term nature of their liabilities. In addition, commercial mortgage loans represent almost 90% of the industry’s total mortgage exposure.

Although life insurers’ commercial loan portfolios have performed well historically and experienced minimal losses through previous economic and credit cycles, commercial mortgage loans with exposure to the retail and lodging sectors are susceptible to price volatility and lower valuations, given the immediate and long-term impacts of stay-at-home and social distancing measures to contain the COVID-19 pandemic and the resulting record unemployment levels. Retail and lodging commercial properties represented 18% and 4%, respectively, of the US insurance industry’s year-end 2019 mortgage loan holdings.

The US insurance industry reported $4.5trn in bonds at year-end 2019, an increase of 3.7% compared to year-end 2018. Corporate bonds and municipal bonds have remained the two largest bond types for US insurers, representing 55.2% and 11.2%, respectively, of total bond exposure. Assetbacked securities (ABS) and other structured securities, agency-backed residential mortgage-backed securities (RMBS), and US government bonds accounted for 9.2%, 6.6% and 6.4% of total bond exposure, respectively.

Exposure to ABS and other structured securities, private-label commercial mortgage-backed securities (CMBS), and agency-backed CMBS increased by 13%, 7% and 15%, respectively, at year-end 2019 compared to year-end 2018. Although exposure to bank loans, exchange-traded funds (ETFs), and bond mutual funds are minimal as a percent of total bonds, exposure in terms of BACV increased significantly, by 17%, 17% and 88%, respectively, in 2019 compared to 2018.

The credit quality of the US insurance industry’s bond holdings has maintained its position compared to 2018. Investment grade bonds, or those with reported NAIC 1 or NAIC 2 designations, accounted for 94.9% of total bonds, which is unchanged from 2018. Below-investment grade bonds, or those with reported NAIC 3 designations and below, represented 5.1% of bond exposure.

The COVID-19 pandemic and a sharp decline in oil prices in the first quarter of 2020 has resulted in significant pressure on credit quality. With most of the US and many other countries practising containment and mitigation measures, many companies have experienced an unprecedented level of business disruption. With this credit backdrop and general expectations for a slow economic recovery, the rating agencies have taken a record number of negative rating actions in the first half of 2020.

Related Articles