US insurers' cash and investments total surpasses $7trn

Written by Adam Cadle

08/06/2022

Total cash and investments of US insurance companies grew by $456bn in 2021 or around 7% year-over-year, reaching a record of over $7trn, according to latest analysis published by Income Research + Management.

The rise marked the third consecutive year of annual growth of 7% or greater. Despite the continued low interest rate environment in 2021, net investment income and unrealised capital gains also reached record highs of $262bn and £115bn respectively, aided by the higher equity allocation within P&C companies.

Overall asset allocation shifts were small and on the margin. P&C ended the year at another all-time high for equity allocations, likely driven by strong equity market returns in 2021, while bonds reached their third consecutive low.

P&C and health insurers continued to decrease their municipal bond (muni) allocations in 2021 given historically low muni yields which diminished the value of the tax exemption. In 2021, muni/Treasury ratios reached historic lows and munis looked expensive relative to many taxable options. Year-to-date, however, according to the analysis there has been a reversal with muni/Treasury ratios rising significantly, presenting an attractive relative value opportunity to add back to the muni sector.

Rob Lund, senior client portfolio manager at Income Research + Management, said: “As rates have risen this year, the value of the tax exemption has also grown. Munis tend to outperform in a rising rate environment so the attractiveness of the asset class is returning and we believe insurer’s muni allocations will stabilise.”

Overall credit quality based on the National Association of Insurance Commissioners (NAIC) designations remained stable. As in prior years, NAIC 1 allocations decreased, while NAIC 2 allocations increased, albeit at a lower rate than prior years.

Allocations to privates continued to increase in 2021 as insurers sought out additional yield.

“As rates potentially rise further and the economy continues to face a number of headwinds in 2022, it will be interesting to see if the trend remains,” Lund stated.

“We believe insurers may move up in quality and back into public bonds given they no longer need to stretch as far as they did the past few years to achieve their desired yield target. Given the volatile environment, maintaining the liquidity of public bonds may also be in favour. Additionally, for some insurers, high-yield (HY) bonds, specifically higher-quality HY, may offer attractive value following the changing Risk-Based Capital (RBC) factors that provide more favourable capital treatment.”

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