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U.S. Insurance Industry Cash and Invested Assets at Year-End 2016
This special report is an update to a previously published report on June 6, 2016, by the NAIC Capital Markets Bureau titled “U.S. Insurance Industry Cash and Invested Assets at Year-End 2015.” In this report, we examine the U.S. insurance industry’s holdings of cash and invested assets, as reported by approximately 4,500 insurance companies for the year ended Dec. 31, 2016, and we review year-over-year (YOY) developments and noteworthy changes in the industry’s asset allocations. This report provides a high-level view of insurers’ year-end 2016 cash and invested assets, including exposure across the five major insurer types and by size of assets under management.
Cash and Invested Assets, Year-End 2016
U.S. insurers, as shown in Table 1, reported more than $6.1 trillion of cash and invested assets, on a book/adjusted carrying value (BACV) basis, for 2016. This includes both affiliated and unaffiliated investments and represented a $324 billion, or close to 5.6%, increase from year-end 2015. In comparison, the industry’s total cash and invested assets had risen by $56 billion, or only 1%, from 2014 to 2015. In terms of BACV growth, the largest increases from 2015 to 2016 for U.S. insurers were in bonds (6.3%), common stocks (8%) and mortgages (almost 9%).
Notable YOY changes, in percentage terms, included a 32% increase in other receivables, a rise of nearly 15% in derivatives, and an 11% decline in preferred stock. In addition, cash and short-term investments increased by 7%, and Schedule BA assets (other long-term investments) increased by 6%.
Table 1: U.S. Insurer Cash and Invested Assets Allocations 2012–2016 ($bil. BACV)* * Includes affiliated and unaffiliated investments
Cash and Invested Assets Distribution Among Insurer Types
The largest portion of insurer assets at year-end 2016 continued to be in bonds, which made up 67% of the industry’s total cash and invested assets. (See Table 2.) Common stock investments were the second largest holding for the industry at almost 12% of total cash and invested assets, followed by mortgages at 8%. Schedule BA assets remained at 5% of the industry’s total cash and invested assets at year-end 2016.
Table 2: Total Cash and Invested Assets Breakdown ($mil. BACV), Year-End 2016
Life companies held the largest share, or 64.8%, of the industry’s total cash and invested assets in 2016, which was relatively consistent with year-end 2015. Property/casualty (P/C) companies continued to account for the second largest portion of assets at 29.7% of total cash and invested assets, which was also relatively consistent with year-end 2015.
Common Stock Exposure
The industry’s aggregate investment in common stocks in 2016 (shown in Table 3) was $727 billion in 2016, an increase of about 8% from $673 billion in 2015. Affiliated common stock investments grew by 6% YOY and constituted 55% of total reported common stock holdings; unaffiliated common stock investments were 40% of total reported common stock, or $292 billion, compared to $272 billion at year-end 2015 (7.4% increase). The increase in U.S. insurer unaffiliated common stock exposure YOY is in part attributable to the 11.9% increase in the Standard & Poor’s (S&P) 500 Index for the same time period.
Similar to year-end 2015, at year-end 2016, the vast majority of common stock holdings, or 73% of the total, was reported by P/C companies, with life companies accounting for 22%.
Table 3: Common Stock Breakout ($mil., BACV), Year-End 2016
Mortgage loans on real estate accounted for 7.6% of insurer’s cash and invested assets at year-end 2016, an increase from 7.3% in the prior year, and a marked growth from 6.6% in 2012. The vast majority of these loans, as in prior years, were in first liens. In 2016, first lien mortgages totaled $456 billion, a $36 billion (or close to 9%) increase over 2015, and a 32% growth over $345 billion in 2012. Mortgages other than first lien were slightly over $8 billion in 2016, having increased by about $1 billion (or 14%) from the prior year. The majority of mortgage loans, or 94% of the industry’s total mortgage loan exposure, was held by life companies in 2016.
Schedule BA assets, which consist of both affiliated and unaffiliated investments, constituted about 5% of insurers’ total cash and invested assets at year-end 2016. Insurers reported an aggregate of $324 billion in total Schedule BA assets, of which $138 billion, or 42%, were in unaffiliated investments. In 2015, unaffiliated Schedule BA investments were $133 billion, or 43.5% of total Schedule BA assets ($306 billion). From year-end 2012 to year-end 2016, Schedule BA assets increased by an aggregate $60 billion (or 23%), with $18 billion of that growth in unaffiliated investments. For more detail on the U.S. insurance industry’s Schedule BA investments, please refer to the NAIC Capital Markets Special Report published July 2017, titled “U.S. Insurer Exposure to Schedule BA (Other Long-Term Invested Assets): Focus on Private Equity, Hedge Funds and Real Estate.”
Other Invested Assets
The industry’s remaining invested assets categories, which made up close to 5% of total cash and invested assets in 2016 (for total of $295 billion), included contract loans, derivatives, real estate, preferred stock, other receivables and reinvested cash collateral from securities lending transactions. In terms of growth over the past five years (2012–2016), the BACV of derivatives exposure has increased by $21 billion (or 49%); from 2015 to 2016, derivatives exposure increased to about $62.5 billion from $54.4 billion (in terms of BACV), or about 15%.
The industry’s cash and short-term investments have been about 4% of total cash and invested assets annually in the past five years. At year-end 2016, the U.S. insurance industry reported a total $242 billion in cash and short-term investments, or $12 billion more than the prior year.
Cash and Invested Assets by Insurer Asset Size
About 73% of the industry’s total cash and invested assets in 2016 was held by the largest U.S. insurers (those with assets under management greater than $10 billion). Total exposure for this group, which included 116 companies in 2016, totaled $4.47 trillion. In 2015, this group held a total of $4.2 trillion, or 72% of total cash and invested assets.
Companies that had between $5 billion and $10 billion assets under management (63 companies) accounted for $444 billion (or 7%) of total cash and invested assets at year-end 2016. This is an increase from $431 billion in 2015, but unchanged as a percentage of total cash and invested assets.
Table 4: Insurance Industry Asset Distribution by Insurer Size ($mil. BACV), Year-End 2016
Bond Breakdown by Sector and Insurer Type
The U.S. insurance industry reported nearly $4.09 trillion in bonds at year-end 2016, an increase from the $3.9 trillion reported in 2015 and $3.63 trillion in 2012. Corporate bonds continued to be more than half of the U.S. insurance industry’s bond investments at $2.2 trillion (see Table 5 and 6), with the second largest bond exposure in municipal bonds at $562 billion (14% of total bonds). And consistent with year-end 2015, life companies accounted for about 70% of the industry’s total bond exposure, followed by P/C companies at about 24% (also relatively consistent with year-end 2015 in percentage terms).
Table 5: Bond Breakdown Across Insurer Types ($mil. BACV), Year-End 2016RMBS - residential mortgage-backed securities; CMBS - commercial mortgage-backed securities; ABS - asset-backed securities.
* New bond categories added at the beginning of the 2016 reporting year
Table 6: Bond Breakdown Across Insurer Types ($mil. BACV), Year-End 2015
The largest concentration within the various bond categories in 2016 for all five major insurer types was in corporate bonds at 54% of total bond exposure. Life insurers had the largest exposure to corporate bonds at about $1.7 trillion (79% of total bonds) at year-end 2016, which was relatively consistent in terms of BACV and percentage with year-end 2015. At year-end 2016, corporate bonds accounted for the largest bond exposure for P/C companies—rather than municipal bonds as in prior years—at almost $348 billion, or 34.8% of total P/C bond exposure. Note, however, that municipal bond exposure for P/C companies in 2016 was not significantly less than exposure to corporate bonds, at $344 billion (or approximately 34% of total P/C bonds) as shown in Table 5. The small difference is likely due to the attractive yields and liquidity offered by corporate bonds compared to municipal bonds while interest rates remain low. In comparison, corporate and municipal bond exposure for P/C companies at year-end 2015 was $332 billion and $343 billion, respectively.
For the 2016 reporting year, two new categories—Exchange Traded Funds (ETF) and Bond Mutual Funds, as identified by the Securities Valuation Office (SVO)—were added to Schedule D Part 1 to separately list these investments according to adopted guidance added to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual), allowing for clearer identification of these investments after recent changes to Statement of Statutory Accounting Principles (SSAP) No. 26R—Bonds revised the measurement method for these securities.
Changes in Insurer Bond Exposures
YOY (2015 to 2016), there was a net increase in bond exposure of $184 billion as shown in Table 7. Within the different bond types, the largest YOY increase (in terms of percentage) was in agency commercial mortgage-backed securities (CMBS) and foreign government bonds. In the current interest rate environment, some foreign government bonds (but certainly not all as German bunds and Japanese government bonds, for example, currently have yields close to 0%) offer higher yields than U.S. government bonds. YOY there was also a small reduction in private label residential mortgage-backed securities (RMBS) and hybrid securities. Note that new issuance and inventory of private label RMBS have been low since the 2008 financial crisis.
Table 7: Changes in Bond Holdings Year-End 2015 – Year-End 2016 ($mil. BACV)
Bond Credit Quality
The credit quality of insurer bond holdings for year-end 2016, consistent with prior years, remained predominantly in high-quality bonds, with more than 94% of bonds carrying NAIC 1 and NAIC 2 (or investment grade) designations. As shown in Graph 1, bonds with an NAIC 1 designation (highest credit quality) composed 66.6% of total bonds as of year-end 2016 (relatively consistent with the prior year), while NAIC 2 designated bonds comprised 27.5% of total bonds (also relatively consistent with the prior year). Bonds carrying NAIC 3 designations remained at 3.5% at year-end 2016, unchanged from 2015, while NAIC 4 designated bonds grew slightly to 1.7% of total bonds, up from 1.5% in 2015.
Graph 1: Year-End 2016 Bond Designations
For life companies, about 6% of their bonds were considered below investment grade based on NAIC designations, which was consistent with year-end 2015. However, about 5% of P/C companies’ bonds were below investment grade (based on NAIC designations) as of year-end 2016 compared to 4.6% at year-end 2015.
Corporate Bond Sectors
Bonds issued by financial services companies, including banks and insurance companies, continued to comprise the largest portion of the industry’s corporate bond exposure in 2016 (in the low 20% range, similar to prior years). Consumer non-cyclical bonds remained the second largest sector for the industry, with other top sectors including utilities, energy and industrial.
The U.S. insurance industry’s total cash and invested assets increased by nearly $324 billion from year-end 2015 to year-end 2016, and life companies continue to account for the largest proportion of the industry’s investments (at 70% of total cash and invested assets) among the five major industry types.
The industry’s allocations of cash and invested assets—in percentage terms—at year-end 2016, however, were essentially unchanged from year-end 2015 and since year-end 2012. Bonds still accounted for about 67% of the industry’s total cash and invested assets, at approximately $4 trillion; corporate bonds were the largest bond category, followed by municipal bonds. Despite large YOY increases in BACV of common stock, mortgages, Schedule BA investments and cash, proportionally (i.e., as a percentage of total cash and invested assets) these investments were relatively consistent with year-end 2015.
Lastly, the credit quality of the industry’s bond holdings at year-end 2016 was consistent with that of prior years, with the overwhelming majority in investment grade categories. More than 94% of bonds carried NAIC 1 or NAIC 2 designations.
The NAIC Capital Markets Bureau will continue to monitor trends within the U.S. insurance industry’s various invested asset types and report as deemed appropriate.
Questions and comments are always welcome. Please contact the Capital Markets Bureau at CapitalMarkets@naic.org.
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