John P. Mohr, CFA, CAIA, is a Director specializing in Insurance Advisory & Solutions, leveraging over 35 years of experience in insurance asset management. He has held leadership roles at Mercer, Strategic Asset Alliance, and Blue Cross Blue Shield, focusing on regulatory updates, trends, and portfolio management.
Through this article, John P. Mohr examines vital investment strategies for U.S. insurers, including extending fixed-income portfolio durations, upgrading credit quality, and maintaining steady allocations to alternative assets. He highlights insights from DWS's 2023 peer group analysis, emphasizing how insurers balance higher yields, economic uncertainties, and diversification needs to optimize their investment portfolios.
As insurance company Chief Financial Officers and Chief Investment Officers consider their investment allocations, risk profiles and overall portfolio structures, peer group analysis is a useful tool to determine how their company compares vs. competitors and peers in their segment of the market. DWS completes our peer group analysis for clients and other interested parties each year based on year-end statutory filing data which is released in the Spring. This analysis provides a wealth of comparisons that can be useful to insurers in structuring their own portfolios, indications of how rating agencies may view them versus other peers, and as a source for potential new investment ideas for their portfolios that might warrant further exploration.
Insurers are strategically extending portfolio durations and upgrading credit quality while maintaining steady allocations to alternative assets-highlighting a cautious yet opportunistic approach to navigating higher yields and economic uncertainties
Fixed Income
DWS completed the year-end 2023 analysis over the summer and noted some interesting dynamics in the data, primarily related to insurer fixed-income portfolios. Given the large allocations to traditional fixed income by insurers (typically ranging from 60 to 80 percent+), trends within this portfolio segment are especially relevant. Below, we summarize the changes from 2022 for insurer fixed-income portfolios. In general, insurers across the industry increased the duration of their portfolios, which typically increases portfolio yield and income but also exposes insurers to more interest rate risk (i.e., bond price depreciation) should rates rise further. Furthermore, we assess that insurers believed we were nearing the top regarding interest rate levels and were locking in the higher all-in yields to prepare for potentially lower rates.
The data also shows that Insurers upgraded the overall credit quality of their fixed-income portfolios. This may result from less compensation for taking on credit risk as credit spreads tighten throughout 2023.
Alternative Assets
Based on data from the National Association of Insurance Commissioners (NAIC), insurers have increasingly allocated assets to non-core fixed-income holdings over the past decade, especially in the alternatives area, which appear on the NAIC’s Schedule BA in insurers' statutory filings. These strategies include equity real estate, debt, below-investment-grade private credit, private equity, tangible assets, and infrastructure. Alternative asset classes may offer insurers several benefits, including higher yield/income, attractive returns, and diversification benefits, but they also come with less liquidity and potentially higher capital charges.
The trend toward further diversification into these alternative asset classes paused, with NAIC Schedule BA allocations remaining steady across insurer types in 2023. We believe this may have resulted from the increased attractiveness of traditional fixed income, given higher yields for public bonds or concerns about deteriorating economic conditions that may negatively impact some of these assets. Despite this, DWS believes that alternatives are “here to stay” and will continue to play an increasingly important role in insurer portfolios over the coming years.
