Since the financial crisis of 2008-2009, the unprecedented environment of lower interest rates has squeezed bond yields, insurance companies’ main source of investment income. There also appears to be little indication of rates rising in the near future.
Conning’s analysis highlights that, on average, insurers have been increasing their allocations to BBB-rated corporate bonds to help generate greater income. However, this strategy is also raising portfolio risk – a notable concern during the later stage of the current credit cycle. A major credit downgrade could cause significant headaches for many insurers.
Conning’s Insurance Insight report “Chasing Yield Through BBBs is Hiking Insurer Credit Risk” provides a look at asset allocation trends in insurance portfolios and thoughts on how greater portfolio diversification may enhance portfolio income and reduce risk.