Continuing low interest rates have prompted life insurers to add credit risk to their portfolios, a shift that has boosted assets but negatively impacted investment income.

Conning discloses this finding in “Life Insurance Industry Investments: Added Risk in 2013.” Exploring strategic issues facing life insurers, the report focuses on major asset classes, investment trends and portfolio results for 430 insurers, the companies grouped by business focus (life, annuities, accident and health, mixed, and reinsurance.) Conning also investigated differences among insurers in terms of allocation and investment results, showing the effects of differences in size and choices in allocation among asset classes.

“In 2013, the life insurance industry saw some possible relief as long-term interest rates rose,” the report states. “However, the long period of decreasing rates to historical lows has taken its toll on investment results for the industry, even with the small respite.

“As interest rates increased in 2013, gross total returns became negative for the first time since 2008, due to reductions in fair value coupled with decreased investment income,” the report adds. “In 2014, interest rates have been falling again, still above historic lows seen in 2012, but dampening prospects for increased investment income.”

Among the report’s key findings:

  • The life industry’s investable assets increased by 2.1 percent or $45 billion between 2012 and 2013, close to the annual growth rate in assets for the observation period, and greater than the 1.4 percent increase seen between 2011 and 2012.
  • Impairments on investable assets totaled about $2.8 billion in 2013, comparing favorably to $58 billion in 2008, the historic high point.
  • The industry earned $181.8 billion in GII (gross investment income) in 2013, an increase of 2.4 percent from $177.5 billion in 2012. For the study period, the compound annual growth rate of GII was 2.1 percent. Fueling the rate of increase in gross investment income during the five-year study period was the growth of invested assets, which increased at an average year-over-year growth rate of 2.6 percent. The increased was counteracted by decreasing dividends, coupons, interest, and rents.
  • Mortgages and real estate represented 11.7 percent of investable assets as of year-end 2013, second only to the industry’s investment in bonds.
  • At $7.5 billion in 2013, preferred stocks are 0.2 percent of insurers’ investable assets. Holdings of unaffiliated common stock increased by 13 percent in 2013. At $34.2 billion, common stock has shown a compound annual growth rate of 7.6 percent since 2009 and now accounts for 1.1 percent of industry investable assets.