Insurers See Record Returns With Riskier Bets, NAIC Reports

By Steven A. Morelli

Insurance companies had the best return on assets in 10 years in 2020, despite last year’s volatility and persistent low interest rates, according to a National Association of Insurance Commissioners report.

Carriers made 7.7% on their cash and invested assets in 2020 year over year, totaling $7.5 trillion, on top of a banner 7% they made in 2019, according to an NAIC special report.

But that good news also came with the observation that insurers have been picking up lower-grade investments in the pursuit of greater yields.

Carriers decreased their holdings of A-grade (NAIC 1) bonds, down to 62% from 65% of holdings. Meanwhile they increased B-grade (NAIC 2) bonds to 32%, up from 30%, along with bumping up their lower-quality (NAIC 3) bonds to 4%, up from 3%.

Many riskier bonds, such as BBB-rated bonds included in NAIC 2, were downgraded to speculative, or “fallen angel,” status in 2020 because of business disruption. Last year saw a record number of corporate bond downgrades, particularly in the wake of the oil price plunge earlier in the year.

The NAIC report authors said the increase in the lower-grade investments might be a reflection of last year’s record number of downgrades, but minimized the risk exposure.

“While there was significant concern that a large amount of fallen angel debt could result in severe market dislocation, the number of fallen angels was below the peaks of prior years, including the financial crisis,” according to the report. “In 2020, the market was able to absorb the additional high-yield debt with limited price volatility or illiquidity, due in part to central bank liquidity programs that provided support for recent fallen angel debt.”

Carries increased their cash and short-term investments 27% in 2020 in response to the uncertain operating environment resulting from the COVID-19 pandemic.

Life companies held a large majority of the assets, 65.3% of the total; followed by property and casualty, 30.5%; health, 4%; and title 0.4%.

Bonds made up 63.6% of all assets, followed by common stock at 13.2%, mortgages at 8.6%, with the remainder spread over eight categories. The report’s authors noted that carriers continue to pursue gain over liquidity in investments such as private equity and hedge funds in the prolonged low-interest rate environment.

“Although these asset classes generally offer higher yields than public corporate bonds, they are typically less liquid and have less credit and pricing transparency,” according to the report. “As such, they are subject to greater price volatility.”

One illiquid investment that carriers reduced was real estate, which continues to suffer in the commercial sector while the residential market booms.

“The pace of growth in mortgage exposure slowed in 2020 compared to YOY growth of more than 8% from 2016 to 2019,” according to the report. “Furthermore, 2020 marks the first year that the annual growth in mortgage loan exposure has not exceeded the annual growth of total cash and invested assets since the NAIC Capital Markets Bureau began tracking data in 2010.”

The authors noted the trend toward lower grade investments, but chalked up some of that to the abnormal year.

“While the U.S. insurance industry’s corporate bond investment portfolio predominantly consists of high credit quality companies, which have greater financial flexibility to withstand the negative credit effects of macroeconomic shocks,” according to the report, “credit quality deterioration was nevertheless evident in the year-end 2020 bond portfolio given the broad-based economic and credit impact of the COVID-19 pandemic.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at stevenamorelli@gmail.com.