According to AM Best, insurers continued to follow a years-long trend by increasing their structured securities investments in 2021, with 3% growth YoY to $1.14 trillion, though indications portray an uncertain picture for 2022 as issuances have dropped significantly.
AM Best notes that despite the overall increase in holdings, insurers’ allocations to structured securities have shifted. Residential mortgage-backed securities still represent the largest allocation among structured securities, suggests the rating agency, despite insurers pulling back holdings by more than 30% since 2011.
Meanwhile, commercial mortgage-backed securities have increased by 46% during the same timeframe and other asset-backed securities, which include collateralised loan obligations (CLO), have more than doubled.
AM Best states that in the search for better yields on their portfolios, insurers have been investing more heavily in CLOs, although the quality of CLOs is lower than that of the popular mortgage-backed securities when viewed by NAIC ratings.
Helen Andersen, industry analyst at AM Best, added, “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.”
“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.”
Citing a number of published reports, AM Best notes that as demand increases in the rising rate environment, the issuance of structured securities has seen a stark drop through October 2022, with credit cards being the only asset-backed security to see growth.
The firm 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.
It writes, “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 in the last decade.”
According to AM Best, the P/C industry has been investing more in structured securities in the last few years, with its share of the industry’s bond holdings increasing to just below 30% in 2021. Health insurers hold the smallest dollar amount of structured securities, but the holdings represent the highest percentage of their total bonds.
The rating agency concludes that structured securities can provide bond portfolio diversification, and it views allocations to various types of structured securities as it would many other traditional asset classes.
