Real estate, sub-investment fixed income, mortgages, private equity, hedge funds, limited partnerships, and private placement debt holdings increased 39% between 2015 and 2020, up 26% of total cash and investment assets. It exceeds. A new report by Moody’s Investors Service.
As a result, these so-called non-current assets accounted for approximately 35% of insurers’ $ 4.04 trillion investment as of December 31, 2020, up from $ 3.2 trillion in 2015 to 32%.
Higher yields from these investments helped slow the industry-wide decline in investment returns, as US interest rates plummeted during the 2008-2009 financial crisis, according to Moody’s. According to Moody’s, the share of return on investment in cash and investment assets has fallen from 5% since 2015 to 4.3%.
The downside of this trend is that it can be more difficult to sell than listed bonds, where assets tend to be replaced. Unloading can be particularly difficult during a recession if an insurer needs to raise large amounts of cash quickly.
At least so far, the industry has a lot of other assets available for quick sale. “These investments generate higher returns than other traditional long-term investments and are good for insurers’ long-term debt and capital surplus,” said Manoji Jetani, senior analyst at Moody’s. I agree. “
This helps insurers outweigh the risky traits as long as they have strong investment capacity and maintain sufficient overall liquidity.
Carriers typically choose high quality listed bonds under the guidelines of the State Insurance Authority, which aims to invest customer premiums and protect consumers until they need to pay insurance claims. increase.
In general, life insurers can afford to make long-term investments because most insurance policies cannot be cashed out at the request of consumers. Instead, insurance that pays death benefits, long-term care costs, and monthly pension income can be on their books for decades.
In an interview, MetLife Chief Investment Officer Stephen Graal said, “The protracted low interest rate environment that followed the massive financial crisis has allowed insurers to manage overall risk while gaining higher yields. I had to look for it. “
MetLife said the US insurance business increased investment in the categories Moody’s details from 38.1% in 2015 to 44.6% of total cash and investment assets in 2020. A range of assets, including private agricultural loans dating back to the 1920s.
In Q3 MetLife, an unusually strong private equity investment cost the Covid-19 surge in deaths and the return to more normal use of dental insurance in employee benefits programs. It makes more money than offsetting. Adjusted profits for the US Group Benefits business were down 72% to $ 111 million, while private equity investments returned $ 1.5 billion (12.6%).
Private equity “has made outstanding achievements last year,” Graal said. Quarterly returns for asset classes in each of the last three quarters meet or exceed the annual guidance. Private equity funds are $ 12.8 billion, or just under 3% of MetLife’s total cash and investment assets of $ 488 billion.
Goulart warned that insurers expect asset-class annual performance to “relax and approach long-term expectations in the low double digits.”
Analysts focus primarily on life insurers, which are a subset of carriers that have made more aggressive investment strategies part of their business model, resulting in illiquid investment across the U.S. life insurance industry. The increase in proportion has received relatively little attention in recent years. Acquired by private equity, asset management and other investment companies.
Many of these new owners say their less common investment expertise, such as private corporate debt and asset-backed securities, makes them more competitive than more cautious insurers. Some insurers have scooped up their insurance business as they withdrew from the products most damaged by low interest rates, such as certain types of pensions.
US life insurers aren’t the only ones looking to private equity funds for higher yields. University funds report impressive returns from such holdings, and pension funds are loaded into illiquid assets such as private equity, private loans to businesses, and real estate.
Venture capital subsets of private equity funds were particularly strong this year, thanks to the recovery in the stock market, which boosted valuations and made an initial public offering that was attractive to portfolio companies.
Wall Street analysts warn that the large-scale results of listed life insurers will make the year-on-year rate of 2022 tougher.
Mark Dwell, an analyst at RBC Capital Markets, said shareholders could be disappointed after a year of supercharging.
“When we revised our model of alternative investment returns for the fourth quarter, we had a hard time remembering what the’normal’looks like,” he said.
Never miss a story! Stay connected and informed with Mint. Download the app now!