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Life insurers increasing exposure to Triple-B corporate credit

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Cash and corporate bonds continue to account for an overwhelming percentage of U.S. life insurers’ investable assets, according to new research.

Conning, a provider of asset management, risk management, capital management and industry research services for insurance companies, discloses this finding in a new report on investing trends at U.S. life insurers. Conducted with the American Council of Life Insurers (ACLI), the study highlights the concerns of 50 U.S. life insurance CEOs, noting declining investment income and the need for capital appreciation as primary concerns.

The report reveals that cash and bonds accounted for 84 percent of U.S. life insurers’ investable assets at the close of third quarter of 2014. This is the same percentage as Conning recorded in 2013, as well in 2011 and 2010.

The report indicates that U.S. life insurers are addressing continuing income needs by adding Triple-B corporate credit exposure and extending out the yield curve, despite declining risk premiums. The study cautions, however, that an exclusive focus on Triple-B credit may be to the detriment of other investment concerns, including the need for diversification and proactive risk management.

“The insurance industry, including life insurers, needs to consider a more holistic approach to enhancing portfolio performance,” says Mike Haylon, Managing Director at Conning. “We strongly believe that companies that incorporate strategies involving diversification, expertise in alternative investing, and a comprehensive risk management approach can position themselves more strategically for growth in the current investment environment.

Conversely, over-concentration in certain investment strategies is likely to weaken the outcome,” he adds.

Among the study’s other key findings:

  • 77 percent of surveyed CEOs say investment yield is critically important to maintaining profitability.

  • More than 80 percent of CEOs are diversifying portfolios beyond traditional fixed income assets as a strategy to drive investment yield and returns.

  • Spreads between Triple-B bonds and treasuries have narrowed dramatically since the financial crisis, so much so that companies have been taking more risk every year, but are getting paid less to do so.

  • The life insurance industry has less than 1 percent of invested assets in emerging market debt, though EM countries are contributing to over 50 percent of global GDP.

  • When looking at government debt to GDP, debt in developed countries represents over 106 percent of GDP, whereas debt in emerging markets countries now represents 33 percent of GDP.

  • Emerging markets debt credit ratings have been on a steady incline. According to Barclay’s Emerging Markets Debt Index, the weighted average rating of this asset class is now in the Triple-B.


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