Best’s Special Report: Marginal Changes In Property/Casualty Investment Portfolios Likely

Business Wire

OLDWICK, N.J.--(BUSINESS WIRE)-- U.S. property/casualty (P/C) insurance companies have benefited from a lengthy period of economic growth and strong bull market, but with projections for growth moderating in 2019, carriers may re-examine their investment policies, according to a new A.M. Best report.

Best’s Special Report, titled, “Marginal Changes in Property/Casualty Investment Portfolios Likely,” states that fundamental shifts in the bond markets are causing carriers to re-think their fixed-income strategies. As of year-end 2017, the U.S. P/C segment held $204.0 billion in government bonds, compared with $181.7 billion in the prior year. The largest strategic shift during this time was out of the municipal bond market, owing to corporate tax reform. Historically, municipal bonds have been an integral part of the P/C segment’s investment portfolio due to low default rates and attractive tax-equivalent yields. At year-end 2017, the segment held $413.0 billion in municipal bonds, a decline from $428.1 billion in the previous. Insurers are beginning to shift away from these assets now that the tax-equivalent yield has become less attractive, a trend that A.M. Best expects to continue in coming years.

P/C insurers allocated a greater—albeit still relatively small—portion of their invested assets to high-yield debt in what has been an essentially zero-interest-rate environment, peaking in 2016 with holdings of approximately 4.7% of bonds in these speculative-grade corporates. However, in 2017, high-yield spreads narrowed on strong earnings and very low volatility in the markets. In addition, as the Fed funds rate continues to rise, the reach for yield becomes less of a concern—at the end of 2017, the segment’s allocation to high-yield bonds had declined to 4.3%. P/C insurers also have been shifting away from hedge funds, as the high fee structures have not generated the promised alpha. A.M. Best believes P/C insurers need to keep an eye on moves by the Federal Reserve, since with a healthy U.S. economy and strong financial markets as a backdrop, the Federal Reserve is maintaining its rate hike path. The year 2018 has seen the return of volatility in the stock and bond markets. Speculative-grade bonds and hedge funds may offer enticing yields and returns, but their volatility and creditworthiness could lead to losses outside of risk tolerances.

The P/C segment recorded net investment income of $51.1 billion in 2017, which more than offset a segment-wide underwriting loss of $24.9 billion, driven by a significant rise in the frequency and severity of natural catastrophes. A.M. Best expects the economic expansion seen so far in 2018 to continue during 2019, though at a slower pace. However, there may be periods of greater volatility in the financial markets, similar to what occurred in early 2018 and has continued into the third quarter.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=280521.

A.M. Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.