Best’s Special Report: U.S. Insurers’ Structured Securities Holdings Continue to Rise

Insurers continued to follow a years-long trend by increasing their structured securities investments in 2021, with 3% growth year over year to $1.14 trillion, according to a new AM Best special report. However, indications portray an uncertain picture for 2022 as issuances have dropped significantly.

The Best’s Special Report, “Insurers’ Structured Securities Holdings Continue to Rise,” also notes that despite the overall increase in holdings, insurers’ allocations to structured securities have shifted somewhat. Residential mortgage-backed securities still represent the largest allocation among structured securities despite insurers pulling back holdings by more than 30% since 2011. At the same time, commercial mortgage-backed securities have increased by 46% during the same timeframe and other asset-backed securities, which include collateralized loan obligations (CLO), have more than doubled.

According to the report, insurers have been investing more heavily in CLOs is the search for better yields on their portfolios, although the quality of CLOs is lower than that of the popular mortgage-backed securities, when viewed by NAIC ratings.

“In the past few years, other asset-backed securities, including CLOs, have made up a much greater proportion of other-than-temporary-impairments, rising to 27.3% in 2021 from 10.7% in 2019, and may continue to rise if concerns about pressure on the underlying collateral are realized,” said Helen Andersen, industry analyst, AM Best. “However, CLO issuance saw a drastic decline in 2021, and holdings are concentrated in larger insurers with the capacity for more rigorous due diligence and extensive research on the underlying collateral pool.”

As demand rises in the rising rate environment, the issuance of structured securities has seen a stark drop through October 2022, according to published reports, with credit cards being the only asset-backed security to see growth. The report adds that CLOs’ floating interest rates can be an advantage in a rising interest rate environment, although they also can increase risk on the underlying pool of borrowers.

Most structured securities are held by the life/annuity industry, at more than $800 billion in 2021. These securities have consistently made up a little less than a third of the bonds held by life/annuity companies the last decade. The property/casualty industry has been investing more heavily in structured securities the last few years, with its share of the industry’s bond holdings increasing to just under 30% in 2021. Health insurers hold the smallest dollar amount of structured securities, but the holdings represent the highest percentage of their total bonds. Structured securities can provide bond portfolio diversification, and AM Best views allocations to various types of structured securities as it would many other traditional asset classes.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=327428.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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