The NAIC’s Capital Markets Bureau monitors developments in the capital markets globally and analyzes their potential impact on the investment portfolios of U.S. insurance companies. A list of archived Capital Markets Bureau Special Reports is available via the index.

Year-End 2014 Insurance Industry Investment Portfolio Asset Allocations

The asset allocations of U.S. insurers’ portfolios have been fairly steady dating back to at least 2010. As of year-end 2014, the top five asset classes as a percentage of total cash and invested assets were bonds (67%), followed by common stock (11.9%), mortgages (6.8%), other assets reported in Schedule BA (5.4%) and cash (4%). Further highlighting the consistency is that the allocation to bonds decreased by only 2.5 percentage points from 69.5% in 2010 to 67% at year-end 2014.

Table 1: Insurance Industry Historical Asset Allocation ($mil)

Table 2: Insurance Industry Historical Asset Allocation (% of Total Cash and Invested Assets)

Since 2010, the book/adjusted carrying value (BACV) of derivative transactions increased 178.2%. Investments in alternative assets such as private equity, hedge funds and joint ventures in real estate increased 38.7% over the same period. The increase in alternative assets, similar to most other investments held by insurers, is affected by the inclusion of affiliated investments. Affiliated alternative investments account for more than 56% of alternative investments. Investments in common stock also increased over that period 32.9%.

Portfolio compositions vary depending on type of insurer, due mostly to appropriately matching assets to liabilities and taking into consideration relative duration and liquidity risk. Portfolio composition also varies by insurer size, likely due to the increased use by larger insurers of outside managers specializing in alternative assets, as well as internal resources and investment expertise. Insurers with less than $250 million in cash and invested assets hold about 69% in bonds, 10% in common stock, and about 17% in cash and other short-term investments, whereas insurers with more than $10 billion in cash and invested assets hold about 66% in bonds, 11% in common stock, and less than 3% in cash and other short-term investments. Insurers with more than $10 billion in assets hold almost 72% of all cash and invested assets in the U.S. insurance industry.

Table 3: Year-End 2014 Insurance Industry Asset Allocations by Insurer Size ($mil)

This special report provides an update on the insurance industry’s portfolio asset allocations, a historical perspective, and a breakdown of the bond sector and bond credit quality, as well as a further breakdown of the corporate bond exposure relative to the largest sectors/industries, as of year-end 2014.

Asset Allocations Comparison Between 2014 and 2013

In 2014, the overall BACV of the insurance industry’s cash and invested assets increased 4.4%, to $5.76 trillion from $5.52 trillion in 2013. As shown in Table 2, the majority of insurance industry investments were in bonds. Bonds also were the largest component of investment portfolios across each of the five insurance company types. In this report, “bonds” include categories such as corporate debt, municipal bonds, structured securities, U.S. government bonds and foreign government bonds. (See Table 6 and Table 7 for a more detailed listing of the bond categories.) The BACV of bonds at year-end 2014 increased 3.6% to $3.86 trillion from $3.73 trillion in 2013.

Common stock and mortgages represented the second- and third-largest assets types at 11.9% and 6.8%, respectively. The top three asset types as a percentage of total cash and invested assets have not changed since 2010. At year-end 2014, common stock investments increased 2.2% to $684.2 billion from $669.4 billion in 2013. This follows a 13.1% increase in 2013 over 2012. In 2013, the Standard & Poor’s 500 Index (S&P) was up 26% and insurer exposure to common stock increased 13.1%, while in 2014, the S&P was up 11.5% and exposure increased only 2.2%. This suggests that while there was growth in common stock, the industry was taking gains. Note that common stock exposure includes affiliate investments. Mortgages accounted for $393.4 billion and $368.5 billion at year-end 2014 and 2013, respectively, for a 6.8% increase.

In 2014, the BACV of derivatives increased 49.4% to $57.1 billion from approximately $38.2 billion in 2013. The notional value of derivatives transactions increased to $2,015 billion at year-end 2014 from $1,854 billion in 2013. Interest rate swaps represented the largest increase to $818 million at year-end 2014 from $714.6 million in 2013. Preferred stock increased 19%, followed by other receivables, also known as broker receivables, by 13.1%. The only decline in assets year-over-year (YOY) was in securities lending (reinvested collateral), which decreased 12.7%. Cash and short-term investments increased 8%.

Table 4: Year-End 2014 Insurance Industry Asset Allocations ($mil)

Table 5: Year-End 2013 Insurance Industry Asset Allocations ($mil)

Life companies accounted for the majority of BACV of cash and invested assets in the industry, at 64.1% as of year-end 2014. P/C companies represented the second-largest, at 30.5% of total cash and invested assets at year-end 2014. Similar to the broader asset class allocations, the overall composition of the insurance industry’s investment portfolios by insurer type did not noticeably change YOY.

The assets of life companies grew 5.1%, while P/C company assets grew 3.4% from year-end 2013 to year-end 2014. The noticeable difference in percentage allocation of bonds and common stock between life and P/C has always been a point of interest to industry observers. In 2014, life companies had 72.5% of total assets in bonds versus 55.6% for P/C companies, whereas life companies allocated 4.0% to common stock versus 28.5% for P/C; however, a sizable portion of the common stock allocation is to affiliated companies and is skewed by a few large insurers that are heavily weighted to equities.

Bonds’ Breakdown Comparison Between 2014 and 2013

In terms of specific bond types within the insurance industry, Table 6 and Table 7 show that approximately half of all bond investments were corporate bonds for year-end 2014 and year-end 2013; this trend was also the same for year-end 2012. Corporate bonds were also the largest exposure in 2011 at 49.5% of total cash and invested assets. As of year-end 2014, total corporate bond investments were almost $2.1 trillion (or approximately 53% of total bond investments), representing a 4.5% increase over year-end 2013 when corporate bond investments totaled about $1.97 trillion.

Life and P/C companies diverged in their allocation to municipal bonds; that is, life companies’ exposure increased while P/C companies’ decreased from year-end 2013 to year-end 2014. Municipal bonds remain the second-largest bond category for the insurance industry since year-end 2011. The exposure was about $540.6 billion, representing a slight (0.7%) increase over $537 billion at year-end 2013. Large year over year increases were evident in terms of BACV for agency commercial mortgage-backed securities (CMBS)—11.1% increase from 2013 to 2014—although, as a percent of total bonds, agency CMBS exposure was 0.9% for both years. Agency CMBS are mortgage-backed securities primarily backed by commercial multifamily housing, unlike the broader mix of property types for non-agency CMBS. Similarly, the BACV of asset-backed securities (ABS) and other structured securities increased 12.1% from 2013 to 2014 (while as a percent of total bonds, ABS and other structured securities’ exposure only increased from 6.3% to 6.8%, as shown in Tables 6 and 7).

Analysis also shows small percentage decreases (in terms of BACV) as of year-end 2014 for foreign government bonds (-3.1%) and hybrid securities (-3%), and a small decrease in agency-backed residential mortgage-backed securities (RMBS) (-1.8%). Year-over-year 2014 total bond investments increased 3.6% from year-end 2013.

The industry’s bond breakdown has changed very little since 2010. The top two bond types were corporate bonds (50% of total bonds) and municipal bonds (14%). Agency-backed RMBS was the third largest exposure at 10% of total bonds. The allocation to agency-backed RMBS, which was 7.8% of total bonds at year-end 2014, was 10% in 2010.

Table 6: Year-End 2014 Bond Breakdown ($mil)

Table 7: Year-End 2013 Bond Breakdown ($mil)

Corporate bonds continue to be the largest category for four of the five insurance company types. The one exception, P/C companies, had its largest exposure in municipal bonds, at approximately $339.8 billion in BACV (or 35.1% of P/C companies’ total bond investments at year-end 2014). For life companies, corporate bonds represented $1.6 trillion (or 60.6% of total bond investments). As Table 8 and Table 9 show, the percentage mix of bond types varies between the different insurance company types due, in part, to duration management and risk appetite. Municipal bonds are the largest bond type for P/C companies; however, they remain only 6% of life companies’ total bond investments. P/C companies generally benefit more from the tax exempt status of most municipal bonds.

Life companies continue as holders of the largest concentration of non-agency (private label) RMBS and CMBS among insurers; however, as a percentage of total bonds the aggregate exposure decreased to 8.4% at year-end 2014 from 8.7% as of 2013. As the housing market recovers, followed perhaps, by an increase in new issuance, insurers may find these assets attractive investments given the higher yields they offer compared to the more traditional investments. Even though U.S. government-related and foreign government debt are usually a small part of insurers’ invested assets, they serve a particular role in their investment portfolios. Insurers typically have a portion of their assets in U.S. Treasuries for a number of reasons, including high credit quality, favorable liquidity, wide maturity distribution, zero haircut in the calculation of RBC, and universal acceptability serving as required collateral in derivative transactions. The overall insurance industry holdings of U.S. government debt increased to about $244 billion as of year-end 2014 from about $231.4 billion in 2013, after three years of declines starting at year-end 2011 when exposure was about $299 billion. In addition to use as collateral for many transactions, investment in U.S. government debt may have increased over the last year due to economic uncertainty in the euro area as well as the turmoil that occurred in Russia and Ukraine, among other reasons.

Table 8: Year-End 2014 Bond Breakdown (%)

Table 9: Year-End 2013 Bond Breakdown (%)

Credit Quality Breakdown

The insurance industry’s bond exposure continues to be predominantly investment grade credit risk with the concentration of NAIC 1 to NAIC 2 designations barely changed YOY; however, as of year-end 2014, the analysis also shows a small increase in non-investment grade designations (NAIC 3 to NAIC 6). There has been a reallocation of bonds designated NAIC 1 to NAIC 2 from 2010 to 2014. In 2010, bonds designated NAIC 1 were 71% of total bonds, while bonds carrying NAIC 2 designations were 23%. As of year-end 2014, bonds designated NAIC 1 and NAIC 2 were 68% and 26% of total bonds, respectively.

Table 10: Year-End 2014 Bond Breakdown – Historical NAIC Designation (%)

Between 94% and 96% of all insurance industry bond investments were investment grade (NAIC 1 and NAIC 2 designations) at year-end 2014. Life companies’ concentration of investment grade holdings was about 94%, while fraternal companies held about 95%. The breakdown between NAIC 1 and NAIC 2 designations shows some fairly significant differences between insurer types. Life and fraternal companies have a much smaller share of NAIC 1-designated investments, and were 62.5% and 62.8% of total bond investments, respectively. This compares to the remaining three insurer types’ proportions, which ranged from 74.6% to 83%. The shift from high investment grade to lower investment grade increases the yield from the insurers’ invested assets, but it also slightly increases the risk and, ultimately, expected loss of the investment portfolio.

Table 11: Year-End 2014 Bond Breakdown – NAIC Designation (%)

Table 12: Year-End 2013 Bond Breakdown – NAIC Designation (%)

Corporate Bonds’ Sector/Industry Breakdown Comparison Between 2014 and 2013

Financials are still the largest sector among corporate bonds held by insurance companies in terms of BACV (about $376.3 billion), representing 24% of total insurance industry corporate bond exposure as of year-end 2014—a small increase from 23% at year-end 2013 but a decrease from 28% in 2010. Financial institutions have been major issuers in the corporate bond market, often accounting for well in excess of 35% of total issuance. The financial crisis raised concerns about volatility in this sector, including the risk of interconnectedness. A more detailed analysis of the U.S. insurance industry’s exposure to the financial sector was published Feb. 12, 2015, in a special report titled “U.S. Insurance Industry Exposure to the Financial Sector in 2014.”

The utilities sector (including electric, gas and water companies) was replaced in 2014 by consumer, non-cyclical as the second-largest sector, whichaccounted for 16% of the industry’s total corporate bond exposure at year-end 2014, while the energy sector (including oil, gas, coal and renewable energy producers) remained third-largest sector with a 13% share of total year-end 2014 corporate bond holdings. The utilities sector dropped to fourth largest sector in terms of exposure in 2014 to 12%. The composition of the top four sectors invested by insurers has not changed since 2010, but the rank order has. At year-end 2010, financials were the largest sector, followed by consumer, non-cyclical (14.3%), utilities (14.1%), and energy (11.0%).

Summary

The insurance industry’s asset allocations have not changed significantly over time, even as insurers make slight adjustments in line with changing economic and market conditions. Bonds continue to be the preferred investment type. Corporate bonds are the preferred bond type. Overall, the broad asset allocations of the insurance industry’s investment portfolios have remained fairly stable YOY, although some asset type proportions have shifted slightly.

Notably, corporate bonds’ share of total bond investments has increased YOY, including in 2014 for the fourth consecutive year. Similarly, both the absolute amount of municipal bonds and their share of total bond investments have steadily increased over the past three years. Notwithstanding the rating action on Puerto Rico in early 2015, as well as the rating action on the state of Illinois and the city of Chicago stemming from ongoing concerns about pension and retiree benefits, municipal credit concerns have diminished. Insurers increased their exposure to U.S. government bonds after a reduction in 2013. A slight shift from investment grade bonds to non-investment grade occurred in 2014; however, NAIC 1- and NAIC 2-designated assets continue to comprise the largest share of invested assets.

The Capital Markets Bureau will continue to monitor trends within the asset allocations in the insurance industry and report on any developments as deemed appropriate.



Questions and comments are always welcomed. Please contact the Capital Markets Bureau at CapitalMarkets@naic.org

The views expressed in this publication do not necessarily represent the views of NAIC, its officers or members. NO WARRANTY IS MADE, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OPINION OR INFORMATION GIVEN OR MADE IN THIS PUBLICATION.

© 1990 - 2015 National Association of Insurance Commissioners. All rights reserved.


Questions and comments are always welcome. Please contact the Capital Markets Bureau at CapitalMarkets@naic.org.

The views expressed in this publication do not necessarily represent the views of NAIC, its officers or members. NO WARRANTY IS MADE, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OPINION OR INFORMATION GIVEN OR MADE IN THIS PUBLICATION.

© 1990 – 2016 National Association of Insurance Commissioners. All rights reserved.