US life companies appear to have the most optimistic view of interest rates in 2015, according to an AM Best survey. Only 22% expect rates to finish the year below 2.00%, compared with 49% for property and casualty (P&C) companies and 45% for health companies.
The AM Best winter 2014-2015 insurance industry survey highlighted the drastic change in sentiment over the previous six months as insurers have become increasingly pessimistic about the possibility of a material change in interest rates in 2015.
In the summer of 2014, just 11% of respondents to AM Best's survey expected interest rates to remain below 2.25% by the end of 2015, versus 67% who responded to the winter 2015 survey.
In the summer survey, 86% of respondents expected rates to finish the year somewhere between 2.25% and 3.50% compared with 32% in Best's latest survey. At the end of March, the 10-Year Treasury hovered around 1.95%.
Not surprisingly, given the interest-rate expectations revealed by the survey, life insurers taking part reported increased interest in less liquid assets.
AM Best noted, "P&C and health companies are more inclined to increase allocations to liquid assets such as municipal bonds and public stocks, whereas life companies are willing to trade liquidity for yield given the long duration of their liabilities."
Thus 56% of respondents in the life/annuity (L/A) industry said they intended to increase allocations to privately-placed bonds, commercial mortgage loans and similar instruments, versus 23% and 34% for P&C and health companies, respectively.
While total bond investments remain relatively stable for the L/A sector, the bond portfolio composition has changed. Over the last couple of years there has been less structured paper and more direct movement into so-called NAIC 2-rated holdings in an effort to gain yield without going too far down the credit spectrum.
Private placements for L/A companies have also gained in importance, "while emerging markets exposure is gaining more importance in well diversified portfolios" noted Best.
For the P&C sector, bonds, stocks and alternative assets received the most attention. "Insurers remain interested in fixed-income or equity-type exposures such as private equity and hedge funds, as opposed to more 'real' asset exposures like real estate or infrastructure," Best commented. "We believe this activity is representative of chief investment officers' comfort in the former and somewhat less knowledge/comfort in the latter."
The survey also showed that the credit quality of investments is the most important consideration when investing "new" money, followed by net yield and the duration match to liabilities.
Credit quality was chosen by approximately 45% of P&C respondents as the most important consideration when investing "new" money. Best said this represents an attempt by insurance company management to minimise portfolio credit risk and the potential capital impact of their investment choices.
Both L/A and health companies said credit quality was a prime consideration. L/A companies also focused on duration matching, while health companies placed more emphasis on liquidity.
AM Best said about 400 insurers completed the survey.