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  • A.M. Best Special Report: Shifts in Bond Portfolio Strategies Help Life/Annuity Insurers Navigate Low Interest Rates

    January 23, 2017 by AM Best

    FOR IMMEDIATE RELEASE

    OLDWICK – JANUARY 20, 2017
    The challenging low interest rate environment has been, and will likely remain, a key obstacle facing the life/annuity (L/A) insurance industry as organizations continue to invest new money as well as proceeds from higher-yielding maturing assets into new assets at current rates, according to an A.M. Best special report.

    The Best’s Special Report, titled “Shifts in Bond Portfolio Strategies Help Life/Annuity Insurers Navigate Low Interest Rates,” notes overall investment portfolio yields, specifically bond portfolio yields, have continued to decline. The recent interest rate hike in December 2016 by the Federal Reserve, an increase of 25 basis points, was only the second rate hike in the last decade.

    Reinvestment risk remains a large challenge and holdings repeatedly have been reinvested at lower rates since 2012. While aggregated industry bond portfolio yields have consistently declined to 4.71% in 2015 from 4.88% in 2014 and 4.99% in 2013, strategic investment decisions have helped mitigate further declines in book yield. If bond portfolio allocations had remained static as of year-end 2012, the industry’s bond portfolio yield would have declined to 4.54% in 2015 from 4.86% in 2013, a 10-20 basis-point difference in each of the last three years alone.

    Private placement bonds have seen a major surge, increasing by 70% to $847.0 billion in 2015 from $497.3 billion in 2005. Due to the more limited availability of private placement bonds, and the required expertise to manage a private placement portfolio, just about 60% of L/A insurers held private placements as part of their bond portfolio as of year-end 2015, and 96% of all private placement bonds were held by insurers with investment portfolios greater than $10 billion.

    According to the report, companies also have increased the duration of their overall bond portfolios. The L/A industry maintained a fairly tight average maturity of under 10 years prior to 2010; however, average maturities have increased to nearly 11 years since 2013.

    Given the expectations of continued low interest rate environment for the intermediate term, insurers will continue to face the task of finding higher yields on assets in order to maintain operating profitability and manage spread compression. The trends of investing lower down the credit scale, increasing portfolio durations and growing allocations to alternative fixed income assets such as private placements are already noticeably underway. It is A.M. Best’s view that by introducing products with lower risk characteristics into an older in-force block of business, L/A/ insurers may be able to manage, perhaps at lower levels of profitability than in years past, a buffer against the continued low rate environment and declining yields.

    To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=257768 .

    A.M. Best is the world’s oldest and most authoritative insurance rating and information source.

    European Union Disclosures
    A.M. Best – Europe Rating Services Limited (AMBERS), a subsidiary of A.M. Best Rating Services, Inc., is an External Credit Assessment Institution (ECAI) in the European Union (EU). Therefore, credit ratings issued and endorsed by AMBERS may be used for regulatory purposes in the EU as per Directive 2006/48/EC.

    Australian Disclosures
    A.M. Best Asia-Pacific Limited (AMBAP), Australian Registered Body Number (ARBN No.150375287), is a limited liability company incorporated and domiciled in Hong Kong. AMBAP is a wholesale Australian Financial Services (AFS) Licence holder (AFS No. 411055) under the Corporations Act 2001. Credit ratings emanating from AMBAP are not intended for and must not be distributed to any person in Australia other than a wholesale client as defined in Chapter 7 of the Corporations Act. AMBAP does not authorize its Credit Ratings to be disseminated by a third-party in a manner that could reasonably be regarded as being intended to influence a retail client in making a decision in relation to a particular product or class of financial product. AMBAP Credit Ratings are intended for wholesale clients only, as defined.

    Credit Ratings determined and disseminated by AMBAP are the opinion of AMBAP only and not any specific credit analyst. AMBAP Credit Ratings are statements of opinion and not statements of fact. They are not recommendations to buy, hold or sell any securities or any other form of financial product, including insurance policies and are not a recommendation to be used to make investment /purchasing decisions.

    Important Notice: A.M. Best’s Credit Ratings are independent and objective opinions, not statements of fact. A.M. Best is not an Investment Advisor, does not offer investment advice of any kind, nor does the company or its Ratings Analysts offer any form of structuring or financial advice. A.M. Best’s credit opinions are not recommendations to buy, sell or hold securities, or to make any other investment decisions. For additional information regarding the use and limitations of credit rating opinions, as well as the rating process, information requirements and other rating related terms and definitions, please view Understanding Best’s Credit Ratings.

    A.M. Best receives compensation for rating related services provided to organizations that it rates. A.M. Best does not offer consulting or advisory services.

    CONTACTS:
    Jason Hopper
    Senior Industry Research Analyst
    Credit Rating Criteria –
    Research and Analysis
    +1 908 439 2200, ext. 5016
    jason.hopper@ambest.com
    Christopher Sharkey
    Manager, Public Relations
    +1 908 439 2200, ext. 5159
    christopher.sharkey@ambest.com

    Jim Peavy
    Director, Public Relations
    +1 908 439 2200, ext. 5644
    james.peavy@ambest.com

    Originally Posted at AM Best on January 20, 2017 by AM Best.

    Categories: Industry Articles
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