P&C and Life Industries: Asset Allocation Trends

New England Asset Management recently conducted research on the P&C and Life industries to assess asset allocation trends from year-end 2023. We conducted a Q&A with them to discuss their findings in both industries.

Mark Yu | Head of Enterprise Capital Strategy | New England Asset Management
mark.yu@neamgroup.com | Learn More >>

SAA: Within the P&C industry, what key asset allocation trends stood out to you most?

NEAM: Asset allocations within the U.S. Property and Casualty (P&C) insurance industry have remained largely consistent, with bonds, equities, and Schedule BA assets representing the top three sectors. However, over the last decade, a noticeable trend has emerged: the allocation to bonds has been decreasing, while the allocation to equities has been increasing.

In 2023, the industry’s allocation to Schedule BA investments saw a significant decline, a shift driven by actions taken by a single major insurer. Another observation that caught our attention last year was the surge in the industry’s holdings in cash and short-term investments, which reached an unprecedented 8.3%. This increase was likely driven by the appeal of short-term interest rates.

SAA: How about for the Life industry?

NEAM: Much like the P&C industry, asset allocations within the Life industry have remained largely stable, with bonds, mortgage loans, and Schedule BA assets making up the top three sectors. Mortgage loans, which represent the second largest sector, have seen a marginal increase over the decade, accounting for 13.7% at the end of 2023. Allocations to Schedule BA assets have also continued to grow over the decade, representing 7.2% at the end of 2023. A notable observation in 2023, similar to the P&C industry, was the increase in cash and short-term holdings, likely due to the attractiveness of short-term interest rates.

SAA: Based on the 2023 industry data, have you observed any significant shifts in the fixed income portfolio? How has the credit quality and duration profile evolved?

NEAM: In 2023, we observed significant shifts in the fixed income portfolios of both the Property & Casualty (P&C) and Life industries. These shifts were characterized by notable changes in credit quality, duration, and sector allocation.

For the P&C industry, the book yield experienced a substantial increase of 54 basis points (bps) in 2023, building on the robust increase of 64 bps in 2022. This rise in yield was achieved through an improvement in the portfolio’s overall credit profile and a slight reduction in its duration. In terms of sector allocation, the P&C industry has been progressively reducing its allocation to tax-exempt municipal bonds particularly since the tax law changes in 2018. The current allocation is just a third of what it was a decade ago. This reduction has been offset by increased allocations to corporate bonds and asset-backed securities (ABS), both of which are trending upwards.

The Life industry also saw a meaningful increase in its book yield of 37 bps in 2023, following a significant increase of 46 bps in 2022. This increase was accompanied by an improvement in credit quality and a shortening of duration. The industry has been gradually reducing its allocation to corporate bonds over the years, while allocations to private placements and ABS reached new highs in 2023.

SAA: In terms of risk asset allocation, what notable changes have we seen in portfolio composition?

NEAM: In our context, risk assets encompass below-investment-grade bonds, equities, and Schedule BA assets. Given the relatively high capital charges for these risk assets and the long-term nature of liabilities in the Life industry, these risk assets are more commonly held in the P&C industry.

The P&C industry’s allocation to risk assets, expressed as a percentage of its surplus, has been on a downward trend since peaking at 87.8% of surplus at the end of 2021. The decline in 2023 was primarily due to a significant reduction in a single large insurer’s allocation to Schedule BA assets. In the same year, allocations to below-investment-grade bonds reached their lowest level, while allocations to equities hit a record high.

SAA: When it's time to review asset allocation trends in 2024, what do you expect to be different from this recent industry research?

NEAM: With the Fed indicating potential rate cuts in the latter part of 2024, there might be a decline in the industry’s allocations to cash and short-term investments from their record-high levels observed in 2023. From a broad sector allocation perspective, we don’t anticipate significant shifts in the overall industry allocations for both the P&C and life industries within a year. As for the fixed income portfolio, the industry’s book yield might stabilize after the substantial increases that we’ve seen over the last two years.

Source: Strategic Asset Alliance, New England Asset Management. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of information cannot be guaranteed.