According to analysts at Moody’s, the trend of US life insurance companies purchasing riskier assets has been driven by a combination of the low-interest rate environment and an influx of private equity investors.
The Moody’s report shows that US life insurers have increased investments in less-liquid and illiquid investments, such private debt, below-investment grade bonds, mortgage loans, real estate and alternative assets, including hedge funds, limited partnerships, and private equity.
At year-end 2020, US life insurers had more than $4 trillion in total cash and invested assets, of which over $1.4 trillion or 35% was invested in less liquid and illiquid assets, which are typically more difficult to sell than traditional assets like public corporate bonds.
According to Moody’s, despite an increase in insurers illiquid assets over the years, insurers liquidity profile has remained strong and consistent. The median liquid assets as a percentage of liquid liability score at year-end 2020 was 2.4x.
Although there is some variability among insurers with respect to their liquidity profile, most US life insurers have scores greater than 2.0x.
While the shift to risker assets creates more downside credit and liquidity risk, life insurers have the expertise in sourcing private debt and will navigate fluctuations in private markets to protect themselves in the event of a market downturn.
Although the sector has capacity to take additional liquidity risk, individual insurers differ in this regard, with some already having reduced their capacity to secure additional illiquidity premiums and still maintain strong asset liability matching.
Moody’s Vice President Manoj Jethani said: “As an offset to their higher risk, these investments generate higher returns than other traditional long-term investments and are a good match for insurance companies’ long-term insurance liabilities and capital surplus.
“Our views also reflect the sector’s high overall liquidity levels and a track record of managing credit and liquidity risks associated with these assets.
“On a more granular level, if illiquid assets are held to levels disproportionate to the liabilities they back, a life insurer can be vulnerable to a market downturn or a company specific liquidity event.”
