Fitch Ratings has released a Special Report that examines the investment portfolios of US life insurance companies at year-end 2013. The results of the report are based on statutory information Fitch compiles annually from an investment survey of its universe of rated life insurance entities. Fitch estimates these results represent approximately two-thirds of the total life insurance industry's general account invested assets and include 15 of the largest 20 life insurance groups in the US based on total admitted assets.
Fitch analyzes each asset class within the life companies' investment portfolios. At year-end 2013, general account assets were predominantly invested in fixed-income securities, including bonds and mortgage loans. For the 35 insurance groups Fitch surveyed, fixed-income securities on average accounted for 84% of total invested assets. The remaining 16% was made up of contract loans at 4%, cash at 2%, stock at 2%, derivatives at 1%, real estate at 1%, and other invested assets including those shown on Schedule BA of the statutory statements at 6%.
As interest rates remain at historically low levels, life insurers have made a modest allocation shift into less liquid asset classes, including alternative investments, private placement corporate bonds and commercial mortgage loans. However, purchases of high-yield fixed-income assets appear to be limited. For the companies Fitch surveyed, the following asset classes as a percent of investments increased from 2011 to 2013: Schedule BA to 5.1% from 4.6%, mortgage loans to 11.5% from 11.0% and private placements to 16.1% from 15.1%.
The bond portfolios of the companies surveyed were heavily weighted toward corporates, which accounted for 63% of the total bond holdings. The credit quality of corporate bonds was generally high with an average credit rating in the 'A'/'BBB' range. Approximately 10% of corporate securities were below investment-grade.
For the surveyed universe, structured securities represented 24% of the bond portfolio. This included agency pass-throughs, commercial mortgage-backed securities(CMBS), non-agency RMBS, and asset-back securities (ABS). Exposure to agency RMBS, commercial mortgage-backed securities(CMBS) and non-agency RMBS was flat to down over the prior year while allocation to ABS increased materially driven by record collateralized loan obligations(CLO) issuance. CLOs represented 33% of the total ABS portfolio, up from 21% in 2012 and 18% in 2011.
In general, government securities constituted a small portion of life insurers' bond portfolios, since these securities offer low yields. US Treasuries and agencies accounted for 5% of total invested assets, municipals accounted for 3% and foreign governments accounted for 1%.
Overall quality of commercial loan portfolios remains solid. 96% of commercial loans had loan-to-values below 80% at year-end 2013, up from 94% at year-end 2012 and 91% at year-end 2011. Debt service coverage ratios(DSCR) were also strong; only 4% of commercial mortgage loans had DSCRs below 1.0x.
Direct common and preferred equity exposure in life insurers' general account portfolios remains low at 2%. Companies also can gain additional exposure to asset classes such as common equity and structured securities through investments shown on Schedule BA of the statutory statements. For most life companies, the bulk of their equity market exposure is taken via guarantees provided on products held in separate accounts.
Cash and short-term investments as a percentage of total invested assets declined to 2% at year-end 2013 from 3% over the past three years. Fitch believes many companies took advantage of the temporary upswings in interest rates in 2013 and invested cash during those periods.
The report "Life Insurers' Investment Portfolios: Results of Fitch's Year-end 2013 Survey," dated 22nd August, is available at ' www.fitchratings.com' under 'Insurance' and 'Special Reports'.
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