The return of the 30-year Treasury bond in February 2006 will be important for insurers in rounding out their investment bond holdings, according to interviews and statutory financial filings.
An examination of data culled from the NAIC Annual Statement Database via National Underwriter Insurance Data Services/Highline Data indicates that in 2004, U.S. government bonds with maturities of over 20 years made up an important part of insurers’ investment portfolios. Holdings in this category amounted to $15.8 billion, 20% of a total $78 billion in U.S. government issuer obligations.
The data examined uses total U.S. government holdings for the year 2004 as a starting point and then breaks out holdings by maturity. While maturities of 20+ years were not the largest category for the top 50, they did represent a significant fifth of all U.S. government issuer obligations.
Holdings of between 10-20 years represented the biggest group with a 27% share of $20.1 billion, followed by the 5- to 10-year maturities with a 24% share. Government securities with 1- to 5-year maturities comprised 22% in 2004 and holdings of 1 year or less, a smaller 7% share.
Maturities of 20 or more years represented 18% of all bond holdings from 1999 through 2004 with the exception of 2002 when the ratio was 17%.
But for U.S. government holdings, longer term maturities were a larger portion of companies’ investments. In the 20+ year category results were as follows: 20% in 2004; 22% in 2003; 21% in 2002; 24% in 2001; 20% in 2000; and, 18% in 1999. It is unclear whether the spike in 2001 was related to the Treasury Department’s decision in October 2001 to stop issuing 30-year bonds and insurers’ decisions to add to their portfolios while these securities were still available.
In a statement, the American Council of Life Insurers, Washington, notes that “insurers were large purchasers of these instruments before they were eliminated a couple of years ago. We anticipate they will be large purchasers now that they are available again.”
Steven A. Kandarian, executive vice president and chief investment officer of MetLife, Inc., New York, says the 30-year Treasury is important for a number of reasons.
For one thing, he says, the re-advent of the 30-year Treasury “will certainly help matching long-term liabilities with long-term assets.”
Even though the current coupon on existing 30-year Treasury bonds is low and spreads among Treasury bonds of shorter maturities are tight, he says the 30-year Treasury is still an important investment tool for insurers.
As of Aug. 30, a 2-year Treasury note had a 4% coupon; a 5-year note, a 4.125% coupon; a 10-year note, a 4.25% coupon; and, an existing 30-year Treasury bond, a 5.375% coupon, according to data from Bloomberg.com.
Besides helping with matching assets and liabilities, Kandarian says the 30-year Treasury bonds also create a benchmark against which insurers can compare corporate securities. Having such a benchmark provides good informational value, he adds.
A Treasury bond is a good way to match liabilities because, unlike a corporate bond, it cannot be called, he explains.
At press time, another major insurer, speaking on background, said that it “views the return of the 30-year Treasury bond as welcome news. Life insurance companies are dealing with commitments to policyholders that can last 20, 30, 40 years into the future. The 30-year Treasury provides insurers with some additional flexibility in terms of matching assets to long-term liabilities.”
‘The 30-year Treasury provides insurers with some additional flexibility to match assets to long-term liabilities’