A new AM Best report indicates that rising interest rates in 2023 increased the portfolio yields of US life/annuity insurers by nearly 30 basis points, from 4.47% to 4.74%.
The Best’s Special Report, “US Life/Annuity Investment Portfolio Yields Rebound in 2023,” attributes the improvement in total portfolio yield to the reinvestment of new funds from strong annuity sales and maturing older bonds into new, higher-yielding bonds, along with new mortgages issued at higher rates. The 2023 gross yield was the highest since 2019. Net investment income for the life/annuity segment increased by 9% in 2023, exceeding $224 billion, marking the second-highest percentage growth in the past decade.
Kaitlin Piasecki, Industry Analyst, AM Best, noted: “Credit quality has begun to improve, with a notable migration up the credit scale to NAIC-1, in the higher interest rate environment.”
“Insurers have been able to earn higher yields while simultaneously investing in higher-quality securities,” further added Piasecki.
The report indicates that mortgage loan holdings, which nearly doubled over the past decade, grew more slowly in 2023, increasing by 5.6% to $733.7 billion. Problem loans—those with overdue interest, in foreclosure, or foreclosed—rose by 82% in 2023 due to challenges in the commercial real estate market. However, these troubled loans, including restructured ones, still account for only about 1% of industry capital and surplus.
The report also notes that alternative asset allocations continued to grow in 2023. The percentage of Schedule BA assets in the total portfolio has increased annually since 2016, reaching 6.4% in 2023. This growth reflects insurers’ pursuit of higher-yielding assets in a low-interest-rate environment, leading to increased investments in private equity funds and alternatives such as private credit.
“The insurance industry has been averse to commercial mortgage classes such as office and retail, in favour of more credit-sound industrial property and multifamily housing,” commented Jason Hopper, Associate Director, Industry Research and Analytics, AM Best.
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