Fitch Ratings has released a Special Report that examines the investment portfolios of US life insurance companies at year-end 2012. 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.
In this report, Fitch analyzes each asset class within the life companies' investment portfolios. At year-end 2012, general account assets were predominately invested in fixed-income securities, including bonds and mortgage loans. For the 34 insurance groups Fitch surveyed, fixed-income securities on average accounted for 84% of total invested assets. The remaining 16% was comprised of other invested assets shown on Schedule BA of the statutory statements at 5%, contract loans at 4%, cash at 3%, stock at 2%, derivatives at 1% and real estate at 1%.
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, Schedule BA assets, as a percentage of total invested assets, increased to 4.9% in 2012 from 4.6% in 2011, while mortgage loans increased to 11.4% from 11.0% and private placement corporates increased to 16.3% from 15.1%.
The bond portfolios of the companies surveyed were heavily weighted toward corporates, which accounted for 62% 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 9% of corporate securities were below investment-grade. Foreign government exposure was minimal at less than 2%. For the surveyed universe, structured securities represented 25% of the investment portfolio. This included agency pass throughs, commercial mortgage-backed securities (CMBS), non-agency RMBS, and asset-back securities (ABS).
Overall quality of commercial loan portfolios remains solid. 94% of commercial loans had loan-to-values below 80% at year-end 2012, up from 91% at year-end 2011. Debt service coverage ratios(DSCR) were also strong; less than 6% of commercial mortgage loans had DSCRs below 1.0x.
Common and preferred equity exposure in life insurers' general account portfolios remains low. For most life companies, the bulk of their equity market exposure is in the separate accounts. Companies also can gain additional exposure to asset classes such as common equity and structured securities through investments held in Schedule BA.
Cash and short-term investments as a percentage of total invested assets remained unchanged from the prior year-end. Fitch believes many companies are holding cash due to long-term interest rate uncertainty.
The report 'Life Insurers' Investment Portfolios: Results of Fitch's Year-end 2012 Survey' is available at www.fitchratings.com under 'Insurance' and 'Special Reports'.
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