US insurers’ high-yield bond exposure rises 4.4% to $227.5bn

Written by Adam Cadle

01/09/2020

US insurance companies reported high-yield bond exposure with a BACV of $227.5bn as of year-end 2019, which was an increase of 4.4% from $217.8bn at year-end 2018, the National Association of Insurance Commissioners (NAIC) has said.

In comparison, the insurance industry’s total bond exposure grew 3.7% in 2019; therefore, high-yield exposure grew at a slightly faster rate than total bond exposure, “indicating that insurers have taken on some incremental risk in higher-yielding debt, given the prolonged low interest rate environment,” the NAIC added.

Exposure to high-yield bonds on a BACV basis has remained within a range of $200bn and $240bn since 2010. Meanwhile, high-yield bonds as a percentage of total bonds has been declining since year-end 2016 when the metric reached a recent peak of 5.9%. As of year-end 2019, high-yield bonds accounted for 5.1% of the US insurance industry’s total bonds, unchanged from the prior year.

While the industry’s overall high-yield exposure as a percent of total bonds was unchanged, it increased at P&C companies to 4.5% at year-end 2019 from 4.1% at year-end 2018. However, this level is lower than the peak for the period analysed of 5% in 2016. High-yield exposure as a per cent of total bonds at the other insurer types declined from year-end 2018 to year-end 2019—from 5.4% to 5.3% for life and fraternal companies, from 5.5% to 5.2% for health companies, and from 6% to 4.7% for title companies.

Although the US insurance industry’s high-yield bond exposure consisted of investments in a variety of bond types as of year-end 2019, corporate bonds represented the majority, or almost two-thirds of the exposure. Bank loans were the second largest at 22%, while structured finance investments, like asset-backed securities (ABS) and other structured securities; private-label residential mortgage-backed securities (RMBS); and private-label commercial mortgage-backed securities (CMBS) accounted for almost 7%. Foreign government bonds, municipal bonds, exchange-traded funds (ETFs) and bond mutual funds, agency-backed RMBS, agency-backed CMBS, and hybrid bonds accounted for the remaining exposure.

As of year-end 2019, structured securities represented 7.1% of high-yield bonds compared to 8.2% as of year-end 2016. Foreign government bonds and municipal bonds accounted for 3.1% and 1.1%, respectively, of high-yield bonds as of year-end 2019, compared to 2.6% and 1.2%, respectively, at year-end 2016.

US insurers’ exposure to high-yield corporate debt, which includes corporate bonds that are publicly traded and privately placed as well as bank loans, as a percentage of total high-yield bonds increased to 87.9% at year-end 2019 from 83.1% at year-end 2016. However, the composition of the industry’s high-yield corporate debt has shifted whereby bank loans represent a larger share of high-yield bond exposure, increasing to 22.1% at year-end 2019 from 9.3% at year-end 2016; and corporate bonds’ share of the industry’s high-yield bond exposure declined to 65.8% at year-end 2019 from 73.7% at year-end 2016.

Total US insurers’ exposure to bank loans increased by 17.5% at year-end 2019 from year-end 2018, as leveraged loan issuance was fairly robust in 2019.

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