U.S. p&c insurers must be careful investors: A.M. Best

Property and casualty insurance companies in the United States have demonstrated continued interest in equity holding, but are advised to be prudent and careful investors by managing the risk of their invested premium dollars, A.M. Best suggests in a special report issued Monday.

The rating agency cites an earlier A.M. Best report, in which respondents from U.S. p&c companies reported their “most favoured investment strategies included shortening their overall portfolio duration and increasing allocations to common and preferred stocks,” notes a statement Monday from the rating agency.

“As the industry remains in this abnormally low interest rate environment, the aforementioned investment strategy is logical as liabilities for most lines are much shorter than their life/annuity industry counterparts, which have favoured increasing their exposure to private placements and other alternative assets,” concludes the report, Property/Casualty Insurers Continue Interest in Equity Holdings, which explores equity allocations of p&c insurance companies.

A.M. Best points out that the equity market has been performing well and has the potential to offer higher returns. “These investment returns can be a key source of financial stability for insurers in a competitive market,” the statement adds.

The report found that the U.S. p&c industry has been steadily increasing allocations to common stocks, which have seen year-over-year growth increases in every year since 2008, growing by 87.3%. Preferred stock positions, however, have declined four times since 2008, resulting in a 33.0% decline for the period, although investments in preferred stocks increased 25.8% in 2014.

As of the end of 2014, the industry held US$350.8 billion in equity holdings, including common and preferred stocks. Common stocks comprise the large majority of equity holdings, rising to a high of 95.8% in 2014.

In addition, unaffiliated equity holdings comprise US$277.4 billion of the p&c industry’s total equity holdings, and mutual funds – which provide a level of diversification compared with individual holdings – account for 6.7% of industry unaffiliated stock holdings in 2014.

While A.M. Best’s recent survey indicates the industry sentiment is to increase equity allocations, the statement notes, “it does appear this strategy is being used in moderation, as opposed to a more drastic type of approach. A.M. Best will continue to monitor the effects of holdings on overall financial positions.”