U.S. health insurers have been coping with low returns on bonds by putting more of their investment portfolios in stocks, and in what regulators classify as "alternative investments."
Analysts at Patpatia & Associates Inc. look at the shift in health insurers' portfolio allocations between 2008 and 2013 in a new report on insurer asset management strategies.
The analysts note that, in many ways, health insurers are more like manufacturers or retailers when it comes to asset management than they are like life and annuity issuers.
Life and annuity issuers use investment returns on about $2 trillion in general account assets to back their obligations to policyholders and annuity contract holders.
Health insurers rely heavily on the premiums paid during a given year to pay the claims incurred during that year. Health insurers' asset managers tend to focus on keeping large amounts of cash and very liquid investments available to pay the bills, and putting some case in longer-term instruments to protect against claim spikes and increase corporate returns, the Patpatia analysts say.
The U.S. economy was starting to melt down in 2008.
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The analysts found that U.S. insurers as a group reduced the percentage of their assets stored in cash and short-term investments to 4.1 percent in 2013, from 6.5 percent in 2008. The percentage of assets allocated to stocks increased to 10.5 percent, from 9.2 percent, and the percentage allocated to the private equity funds, aircraft leases, hedge funds and other vehicles reported to state regulators on Schedule BA increased to 5.4 percent, from 3.8 percent.
Because of regulatory constraints, life companies have actually reduced the share of their assets in stocks, to 4.7 percent, from 5.7 percent. They increased Schedule BA allocations to 4.3 percent, from 3.5 percent.
Property-casualty (p-c) insurers pumped up their stock allocations to 22 percent of portfolio assets, from 16.1 percent, and Schedule BA allocations to 7.7 percent, from 4.6 percent.
Health insurers behaved more like p-c insurers than like life and annuity issuers. Health insurers increased their stock allocations to 21.5 percent of their $171 billion in total portfolio assets, or about $37 billion, from 18.7 percent in 2008.
Health insurers increased Schedule BA allocations to 4.6 percent of portfolio assets, or $7.9 billion, from 2.7 percent.
Health insurers earned a total return of only 3.9 percent on their Schedule BA assets, the analysts say.