Bloomberg News

Insurers Add Risk, Sacrifice Liquidity in Hunt for Yield

August 29, 2012

U.S. life insurers, a group led by MetLife Inc., are turning to riskier and less-liquid assets as they work to increase investment income amid near record-low interest rates, Moody’s Investors Service said.

Portfolio managers are adding high-yield bonds, commercial mortgages and bank loans to boost income, while attempting to limit risk if rates do rise, according to the ratings firm.

“Insurers are naturally searching for yield,” said Ann Perry, a senior credit officer at New York-based Moody’s. “They are devoting or allocating a little bit more money to high-yield investments, to alternatives.”

Life insurers build investment portfolios to back payouts on long-term obligations such as annuities and policies that provide cash to survivors when customers die. They’ve struggled to maintain investment income as the Federal Reserve pledged to keep interest rates low through at least late 2014, sending the average yield on the 10-year Treasury to 1.81 percent in the second quarter of this year, compared with 3.19 percent in the same period a year earlier.

“They’re not trying to garner yield simply by going out further on the yield curve,” said Joel Levine, an associate managing director at Moody’s. “Many companies view the direction of rates ultimately to be going up and you don’t want to be long.”

MetLife, the largest U.S. life insurer, said the average yield on its $367.1 billion of fixed-maturity securities fell to 4.76 percent as of June 30 from 4.94 percent a year earlier.

Junk Bonds

Chief Executive Officer Steven Kandarian has focused on private lending to corporations, saying rates are higher with less liquid securities. The New York-based firm boosted its allocation to U.S. corporate bonds to 30.1 percent of fixed- maturity holdings from 28.3 percent a year earlier and limited foreign holdings, according to its second quarter financial supplement.

American International Group Inc. (AIG:US), the bailed-out insurer, purchased $7.1 billion of mortgage investments this year from the Maiden Lane III vehicle created to aid in its rescue as it works to boost yields, the New York-based firm said this month.

The assets “are very good for this company on the yield basis going forward, especially in this lower interest rate environment,” CEO Robert Benmosche said on an Aug. 3 conference call with analysts.

U.S. life insurers increased their high-yield allocation to 8 percent of corporate bonds last year from about 6 percent in 2010, while reducing holdings of bonds rated A or higher to 49 percent from 50 percent, JPMorgan Chase & Co. analysts led by Eric Beinstein wrote in an Aug. 24 research report.

Among the 20 largest life insurers, 33 percent of $1.9 trillion in total assets was allocated to corporate bonds and 22 percent to structured products such as mortgage-backed securities, JPMorgan said. Mortgages comprised 12 percent.

“Recent yield pressure has driven life insurance companies to increase the portion of their holdings to lower-rated bonds and emerging markets corporate issuers,” the analysts wrote.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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Companies Mentioned

  • AIG
    (American International Group Inc)
    • $56.06 USD
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