U.S. life insurers are backing Americans’ policies with bigger slugs of riskier, higher-yielding investments, the Wall Street Journal reported. Holdings of real estate, below-investment-grade bonds, mortgage loans, private equity, hedge funds, limited partnerships and privately placed debt increased 39% from 2015 to 2020, outpacing the 26% increase in total cash and invested assets, according to a new report by Moody’s Investors Service. As a result, these so-called illiquid assets represented about 35% of insurers’ $4.04 trillion in investments as of Dec. 31, 2020, up from 32% out of $3.2 trillion in 2015. Higher yields from these investments have helped slow an industrywide decline in investment income since U.S. interest rates plummeted during the financial crisis of 2008-09, Moody’s said. Investment income as a percentage of cash and invested assets has fallen to 4.3% from 5% since 2015, according to Moody’s. A drawback to the trend is that the assets can be harder to sell than the publicly traded bonds they tend to replace. Should an insurer need to raise a lot of cash quickly, they could be especially difficult to unload in an economic downturn. So far at least, the industry has plenty of other assets to tap for quick sale. “These investments generate higher returns than other traditional long-term investments and are a good match for insurance companies’ long-term insurance liabilities and capital surplus,” Manoj Jethani, a senior analyst at Moody’s, said about the rise in illiquid investments.
