US insurers must keep a close eye on the risk profile of their investment portfolios as they seek higher yields, Standard & Poor’s has warned.
The rating agency said in a report called ‘US Insurers Maintain Risk Discipline In The Hunt For Higher Yield’ that it has observed a trend toward alternative investments and a recent shift to lower-rated investment-grade bonds as insurers search for yield.
“The composition of insurance-company investment portfolios has undergone intense scrutiny since the financial crisis,” the report said. “That has caused insurers both to seek out higher-yielding assets to boost investment income, and to bolster their risk-management practices.”
The sheer size of insurance companies' portfolios ensures that they will continue to be among the largest and most influential investors in the global capital markets, the report said. “Portfolios have not changed dramatically, but there is a trend toward alternative investments and a recent shift to lower-rated investment-grade bonds as insurers search for yield. Generally, yields have slid with interest rates, but observed total return volatility for property/casualty (P/C) insurers remains greater than that among life insurers.”
Corporate structure, ownership, and product mix influence asset allocation and portfolio performance, and a greater focus on enterprise risk management also serves insurers well. "Our stable outlook on the ratings of most life and P/C insurers indicates that we believe they will continue to perform relatively well during the next one-to-two years," said Standard & Poor's credit analyst Greg Gaskel.