US life/annuity investment portfolio yields rebound in 2023

Written by Adam Cadle

21/05/2024

Rising interest rates in 2023 helped boost the portfolio yields of US life/annuity insurers by nearly 30 basis points, to 4.74% from 4.47% in the previous year, according to AM Best.

AM Best said that the improvement in total portfolio yield occurred as new dollars from strong annuity sales and older maturing bonds were replaced with new bonds yielding higher rates, along with new mortgages issued at higher rates. The 2023 gross yield was the highest recorded by the industry since 2019. Net investment income for the life/annuity segment grew by 9% in 2023 to more than $224bn, the second-highest percentage growth in the last 10 years.

“Credit quality has begun to improve, with a notable migration up the credit scale to NAIC-1, in the higher interest rate environment,” said Kaitlin Piasecki, industry analyst, AM Best.

“Insurers have been able to earn higher yields while simultaneously investing in higher quality securities.”

AM Best also stated that mortgage loan holdings, which had nearly doubled in the last 10 years, grew at a slower pace in 2023, by 5.6% to $733.7bn. Problem loans – those with overdue interest or that are in foreclosure or have been foreclosed – were up by 82% in 2023, as the commercial real estate market continues to face headwinds. However, these loans, including those that were restructured, remain approximately just 1% of industry capital and surplus.

“The insurance industry has been averse to commercial mortgage classes such as office and retail, in favour of more credit-sound industrial property and multifamily housing,” said Jason Hopper, associate director, industry research and analytics, AM Best.

The report also stated that alternative asset allocations continued to grow in 2023. The percentage of Schedule BA assets in the total portfolio has increased each since 2016 and stood at 6.4% in 2023. The growth in this asset class has been notable, as insurers sought higher yielding assets in the low interest rate environment, expanding their investments in private equity funds and alternatives such as private credit.

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