Alternative Investments Boost P/C Insurer Income Volatility, Returns

Fitch Ratings-New York/Chicago-15 December 2021: U.S. property/casualty insurers have modestly increased allocations to higher yielding alternative investments as they continue to navigate low interest rates and low book yields on core fixed-income investments, says Fitch Ratings. Favorable performance from alternatives has boosted overall GAAP investment income in 2021 amid sustained low interest rates. However, Fitch expects alternative assets to add to volatility in GAAP investment income, increasing the potential for underperformance in reported operating earnings in a market downturn.

Capital markets volatility in 2020-2021 has led to greater fluctuation in GAAP net investment income, demonstrated by the 2021YTD contribution to net investment income from alternative assets for 10 large P/C insurers, which increased materially for nearly all companies in the group. Average contribution to GAAP net investment income from alternatives was 32.8% in the group in 9M21 compared to an average of 13.8% over the prior five years.