Best’s News & Research Service - November 07, 2022 09:35 AM (EST)
Best’s Special Report: Private Placements, Structured Securities Bigger Part of Fixed Income Portfolios for Health Insurers
- November 07, 2022 09:35 AM (EST)
Oldwick //BestWire// - The share of private placements bonds and structured securities has risen markedly in the fixed-income portfolios of U.S. health insurers in recent years as carriers have retooled investment strategies at the margin to bolster overall returns.
In its Best’s Special Report, “Private Placements, Structured Securities Now a Bigger Part of Fixed Income Portfolios for Health Insurers,” AM Best states that health insurers’ invested assets have increased by more than 50% since 2016 to over $320 billion in 2021, aided by consistently strong premium growth. Fixed income remains the largest allocation across the industry.
A shift from publicly traded debt to less liquid private placements has contributed to a decline in fixed income quality. Private placements constituted just 5.4% of the total fixed-income portfolio in 2013, contributing less than 1% of total below investment grade fixed income securities. By 2021, private placements constituted 20.6% of all fixed-income securities, and contributed 7% of total below investment grade securities. This deterioration in bond quality was much more acute for stock companies, which increased their allocation to lower rated bonds and private placements by a much larger percentage than did mutual or non-profit companies.
“The deterioration in quality, while providing some additional yield, increases the exposure of portfolios to pro-cyclical credit and market risks,” said John McGlynn, financial analyst, AM Best. “Given the current market environment of rising U.S. Treasury rates and expanding credit spreads, this trend may reverse itself as companies can attain target portfolio yields without venturing so far on the risk spectrum. However, this transition will probably be accompanied by large short-term unrealized losses, as fixed-income assets suffer mark-to-market losses on a GAAP basis.”
The report also states that structured securities now account for 27.9% of the fixed income portfolio for U.S. health insurers, up from 18.8% in 2016. The vast majority of structured securities previously consisted mostly of residential mortgage-backed securities, but that has declined to less than half of total holdings from nearly two-thirds of structured securities holdings in 2013. Health carriers have turned to commercial mortgage-backed securities and other asset-backed securities, which together compose more than half of total holdings. Much of the asset-backed securities growth was driven by collateralized loan obligation securities, which have grown to over $7 billion in 2021 from less than $1 billion in 2016.
Mutual and nonprofit companies remained overweight equity exposure in 2021, with 17.7% and 18.3% allocations, respectfully. This is compared with just 4.2% at stock companies. “Mutual and nonprofit companies overweight equities for various reasons. While AM Best generally has a negative view of elevated allocation to equities, it does acknowledge that in some case mutuals and nonprofits must hold higher equity investments in order to improve financial flexibility, manage risk-based capital, alleviate regulatory scrutiny and supplement earnings,” said McGlynn.
AM Best views the current level of risk-adjusted capitalization of most rated mutual and nonprofit health companies as sufficient to withstand near-term investment market volatility.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=325725 .
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.