Course Correction: As investment environment becomes “risk off,” insurers revisit portfolio strategies

June 28, 2022

By Rich Sega, Global Chief Investment Strategist


For years the insurance industry has dealt with margin pressure from low interest rates, leading to income-seeking, risk-bearing approaches that have worked well in a non-inflationary, strong corporate earnings environment. However, the experiences of the past year signal that a change, perhaps even a reversal, of some of those strategies is underway.


A Decade of Financial Repression

Insurers have faced many disruptors to the business and investment strategies that supported them since the so-called Great Recession ended in 2009. During that time, insurance portfolios were under pressure to produce the income and contribute to the margins necessary to support the companies’ financial strength and meet obligations to policyholders.


Chronically low interest rates and changing consumer preferences gradually pushed insurers’ allocations away from long-favored high-grade corporate bonds and government securities. Modern insurance portfolios for the most part tend to be far more diversified, although corporate credit still dominates. Insurers have gone lower in credit quality, longer on the duration spectrum, and down in available liquidity.


As an example (see Figure 1), the P&C industry’s allocation in bonds rated AAA-A was down to 50.3% in 2021 from 60.2% in 2016. The allocation to BBB, which had been rising for several years, reached 12.1% in 2020 before slipping back to 11.6% in 2021. Private bonds are also on the rise and reached 19.9% in 2021, up from 12.8% in 2016. Despite these changes, the average investment yield for P&C insurers in 2021 was 2.75%, flat from 2020 and down 57 basis points from 2018.


In the life industry, the challenge has been greater for the smaller and mid-sized firms, which comprise most of Conning’s client base. We have helped many life companies diversify into less traditional asset classes, but their larger peers appear further along. Those smaller insurers have been making everincreasing allocations to corporate bonds rated BBB but are having difficulty keeping up.


Overall, these actions have barely held insurers’ portfolio earnings rates on an even keel as valuations have climbed and market rates fallen.


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