US life insurers in 2018 continued to shift towards less liquid asset classes in search for yield, according to Fitch Ratings analysts.
Insurers are believed to have increased allocation to commercial mortgage loans and collateralised loan obligations (CLO) over the year in order to mitigate the impact of a protracted low interest rate environment.
“Favorably, despite the late stage of the credit cycle, risk levels in life insurers portfolios remain below long-term averages and consistent with prior years,” said Jamie Tucker, Fitch Ratings Director.
“The allocation to illiquid asset classes has continued to trend up, but this should be manageable in the context of the industry’s very strong liquidity profile,” he added.
“Tactical shifts in the asset mix, while modest overall, will continue throughout 2019 as historically low interest rates are expected to remain a headwind for the industry.”
Overall, Fitch analysts say there have not been material changes in life insurers’ asset allocation over the past several years.
Bonds comprised 72% of invested assets at YE18, the quality of which remains strong, while CLOs represented 2% of the surveyed universe’s invested assets.
Fitch expects the allocation to mortgage loans to increase modestly in 2019 and mortgages to perform well over the next one to two years, with a modest uptick in impairments and defaults driven by deteriorating underwriting standards.
