27 March 2015

US life insurers buy more triple-B paper

US life insurance companies continuing to add triple-B corporate credit exposure as a primary tool in the current investment climate are overlooking a broader, diversified approach and the need for proactive risk management to attain improved performance.

This is one of the points that emerges from research by US insurance asset manager Conning and a survey of 50 US life insurance CEOs carried out by Conning with the American Council of Life Insurers (ACLI).

Over the past five years, Conning reports, life insurance companies "have continued to address their income needs by adding triple-B corporate credit exposure and extending out the yield curve – despite declining risk premiums."

Conning said that (life) 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.

"The insurance industry, including life insurers, needs to consider a more holistic approach to enhancing portfolio performance," said Mike Haylon, managing director at Conning.

Key points from the Conning/ACLI survey:  

  • 77% of surveyed CEOs of life insurance companies indicated investment yield was of critical importance to maintain profitability. 
  • More than 80% of surveyed CEOs are diversifying portfolios beyond traditional fixed-income assets as a strategy to drive investment yield and returns. 

Key points from the Conning insurance research:  

  • 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% of invested assets in emerging market debt even though EM countries are contributing to over 50% of global GDP.
  • When looking at government debt to GDP, debt in developed countries represents over 106% of GDP, whereas debt in emerging markets countries now represents 33% of GDP.
  • Emerging markets debt credit ratings have been on a steady incline. According to Barclays' emerging markets debt index, the weighted average rating of this asset class is now triple-B.