NAIC Update on Insurance Industry Investment Portfolio Asset Mixes
NAIC Update on Insurance Industry Investment Portfolio Asset Mixes
By the Capital Markets Bureau of the NAIC
NEW YORK, N.Y.—The asset mix of an insurance company’s investment portfolio varies over time based on different influences, including both macroeconomic and industry-specific factors. The general state of the global economy, industry trends, market events and the political environment all impact investment-management decisions. Similar to other industries, for U.S. insurance companies, a change in risk appetite also tends to result in an adjustment to investment strategies and philosophies. In a strong economy, risk appetite typically increases, and the converse is true during poor economic conditions.
Depending on the insurer type, portfolio compositions vary, due mostly to appropriately matching assets to liabilities and taking into consideration relative duration and liquidity risk. For example, life companies have longer-term liabilities than property/ casualty companies; therefore, the former invests more heavily in longer-term assets, such as bonds with 30-year maturities, than do the other insurer types.
The U.S. economy seems to be on a path of slow but fairly steady recovery, and investors’ biggest concern has been the continued period of low interest rates. Rewinding back to 2010, the market sentiment indicated a “flight to quality” — that is, a conscious move to safer, less volatile and shorter duration investments — in a time of continued distress within the financial markets (particularly within banks), as well as ongoing concerns about residential and commercial real estate, which appeared to be worsening modestly. Fast-forwarding two years to 2012, with recessionary concerns largely dissipating and market sentiment improving, investors’ risk appetites have been increasing in the prolonged low-interest environment. This environment may have compelled insurers to “reach for yield” as they have been struggling to find high-quality investments with attractive returns.
The NAIC Capital Markets Bureau published a special report in August 2011 titled, “Analysis of Insurance Industry Investment Portfolio Asset Mixes,” which studied the insurance industry’s portfolio asset mix across the five general insurance company types (life, property/casualty, fraternal, health and title) as of year-end 2010, year-end 2008 and year-end 2005. This special report provides an update on the insurance industry’s portfolio asset mix, as well as a breakdown of the bond sector and a further breakdown of the corporate bond exposure into sectors/industries, as of yearend 2012 and year-end 2011.
In both of the analyzed years, bonds consistently represented the majority of U.S. insurance industry investments, ranging between 68% and 70% of total cash and invested assets. And within the bond sector, the largest bond type in both years was corporate bonds, ranging between approximately 49% and 52% of total bond investments. Investments across other asset types tended to vary.
Asset Mix Comparison Between 2012 and 2011
As of year-end 2012, the overall insurance industry’s assets amounted to $5.35 trillion in terms of book/adjusted carrying value (BACV), which was a 2.3% increase from year-end 2011’s total assets of $5.23 trillion. The latter was, in turn, a 4.1% increase from year-end 2010’s value of $5.02 trillion. The majority of insurance industry investments in both years was in bonds. Bonds also were the largest component of investment portfolios across each of the five insurance company types. They include categories such as corporate debt, municipal bonds, structured securities, U.S. government bonds and foreign government bonds. Although the total amount of bond investments at year-end 2012 was $3.66 trillion – higher than a year earlier ($3.63 trillion) – their share of total cash and invested assets decreased to 68.4% from year-end 2011’s number (69.5%).
Common stock was the second-largest asset type in both years. At year-end 2012, common stock investments amounted to almost $590 billion (or 11.0% of total cash and invested assets), up from $549 billion (or 10.5% of total cash and invested assets) at year-end 2011. Although this exhibited a 7.5% increase in the insurance industry’s common stock investments year-over-year, it was significantly less than the 16% total return delivered by the S&P 500 index in 2012. Given that backdrop, insurers have likely scaled back their common stock holdings relative to the overall market.
Mortgages and first liens were the third-largest asset type, accounting for $351.4 billion (or 6.6% of total cash and invested assets) and $338.3 billion (or 6.5%) at year-end 2012 and 2011, respectively. Overall, the broad asset mix of the U.S. insurance industry’s investment portfolios has remained fairly stable year-over-year, even as some asset type proportions have shifted slightly.
The complete report is available on the NAIC’s web site. Check the IAM frontpage link titled “NAIC Capital Markets Reports”.
