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FOR IMMEDIATE RELEASE
OLDWICK - SEPTEMBER 22, 2015 02:11 PM (EDT)
As interest rates remain persistently low, alternative assets and less liquid bonds have provided insurers with the potential for higher returns to help mitigate the run-off of higher portfolio returns.
In a new Best's Special Report, titled, "Fair Value Level 3 Industry Bond Holdings Increase Year-Over-Year," it states that without a meaningful increase in interest rates, insurers have limited choices for investing cash from maturing securities and new premiums to obtain targeted risk-adjusted returns. Within the industry's bond portfolio, A.M. Best has reviewed the credit exposure by taking a look at fair value. This new disclosure requirement found on Schedule D of the statutory filings provides additional insight into company behavior in managing its bond portfolios. In this report, A.M. Best summarizes the fair value data, which is currently available only for 2013 and 2014.
Overall, the fair value Level 3 insurance industry bond holdings increased 7.5% in 2014 compared with 2013. This compares with a 3.2% increase in Level 2 holdings and a 0.8% increase for Level 1. The entire growth in Level 3 holdings stemmed from the life/annuity (L/A) segment, which reported a 9.8% increase, while the property/casualty (P/C) segment declined 3.9% and the health segment declined 5.8%. A portion of the increase from the L/A segment stems from its increasing exposure to private placement investments, which may be regarded as either Level 2 or Level 3 instruments depending on bond similarities.
Overall, bonds determined to be fair value Level 2 remained the largest level in 2014 at 87.5% for the total industry, relatively even with the 87.6% reported in 2013. While slightly varying between insurance segments, all three segments have Level 2 allocations in the mid-to-high 80% range, with the L/A segment being slightly above the industry level and the P/C and health segments somewhat below the industry level. A.M. Best notes that the L/A segment does account for nearly 80% of the insurance industry bonds analyzed within this study. Bonds valued at Level 3 composed 6.9% of total industry bonds in 2014, an increase from 6.6% reported in 2013.
On an aggregated total industry basis, a large majority of insurers have no corporate bonds with a determined fair value at Level 3. While exposure varies from company to company, 3.7% of L/A companies have more than half of their total corporate bond holdings valued at Level 3. This compares with 1.2% for P/C companies and 0.2% for health insurers.
A.M. Best does treat these investments more cautiously as there may be more debate about accurate valuations.
For the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=241628 .
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.