Life insurers use riskier assets to support consumers’ policies

Holdings of real estate, below-investment-grade bonds, mortgage loans, private equity, hedge funds, limited partnerships and privately held debt grew 39% from 2015 to 2020, with total cash and invested assets increasing by 26%. That’s according to a new report from Moody’s Investors Service.

As a result, these so-called illiquid assets represented approximately 35% of insurers’ investments of $4.04 trillion as of December 31, 2020, up from 32% of $3.2 trillion in 2015.

Moody’s said higher yields from these investments have helped slow the industry’s decline in investment income since the fall in US interest rates during the 2008-09 financial crisis. According to Moody’s, investment income as a percentage of cash and invested assets has fallen from 5% to 4.3% since 2015.

One drawback to the trend is that assets can be more difficult to sell than the publicly traded bonds they replace. If the insurer needs to raise a lot of cash quickly, it can be especially difficult to land them in an economic downturn.

At least for now, the industry has plenty of other properties to tap for a quick sale. Manoj Jethani, a senior analyst at Moody’s, said of the growth in illiquid investments, “These investments generate higher returns than other traditional long-term investments and are a good match for insurance companies’ long-term insurance liabilities and capital surpluses.”

This helps them to get ahead of their riskier features, as long as the insurer has strong investment capability and maintains adequate overall liquidity, he said.

Carriers invest customers’ premiums as long as necessary to pay claims, and under state-insured-department guidelines aimed at protecting consumers, they generally chose high-quality publicly traded bonds. Is.

In general, life insurers have the flexibility to go with long-term investments as most policies cannot be redeemed on demand by the consumers. Instead, policies that pay death benefits, long-term care bills and monthly annuity income may be on their books for decades.

MetLife Inc. “The prolonged low-interest rate environment, which began after the great financial crisis, requires insurers to look for assets that manage the overall risk,” Steven Goulart, chief investment officer of the US, said in an interview. yields high yields.”

MetLife said its US insurance operations increased investments by Moody’s across broad categories to 44.6% of total cash and invested assets in 2020, up from 38.1% in 2015. MetLife, the nation’s largest publicly traded life insurer, has a long history. Series of assets, including private agricultural loans dating back to the 1920s.

At MetLife during the third quarter, unusually strong private-equity investments outweighed costs, offset by a rise in COVID-19 deaths and a return to more-than-normal use of dental insurance in employee-benefit programs. Adjusted earnings for its US group-for-profit business fell 72% to $111 million, while its private-equity investments returned $1.5 billion, or 12.6%.

“Private equity has been the best performer over the past year. Quarterly returns for the asset class in each of the past three quarters have met or exceeded its annual guidance,” Mr. Goulart said. At $12.8 billion, private-equity funds represent less than 3% of MetLife’s total cash and $488 billion of invested assets.

Mr. Goulart cautioned that the insurer expects the asset class’s annual performance to be “moderate and return to our long-term expectations of low double digits.”

US The growing percentage of liquid investments in the life-insurance industry has received relatively little attention in recent years, as analysts have largely focused on a subset of carriers that have made more aggressive investment strategies part of their business models. Life-insurance companies acquired by private-equity, asset-management and other investment firms.

Many of these new owners say that their expertise, along with less-than-usual investments, such as privately held corporate debt and asset-backed securities, give them a competitive edge over more cautious insurers. They have grown insurance businesses as some carriers withdrew from products affected by low interest rates, such as some types of annuities.

American life insurers are not alone in turning to private-equity funds for higher returns. University endowments are reporting impressive returns from such holdings, and pension funds are loading up on illiquid assets like private equity, private loans to companies, and real estate.

The venture-capital subset of private-equity funds in particular has paid off well this year, thanks to a rally in stock markets that have raised valuations and made attractive initial public offerings for portfolio companies.

Wall Street analysts have warned that publicly traded life insurers’ outsize results will be tougher year-over-year comparisons in 2022.

Shareholders may be disappointed after a year of turbocharged results, said Mark Dwell, an analyst at RBC Capital Markets.

“In revising our model for fourth quarter alternative investment income, we were really struggling to remember what ‘normal’ looked like,” he said.