US insurers under pressure after doubling private placement assets: AM Best
By Charlie Wood ____fter US insurers ramped up their private placement bond holdings to $1.4 trillion at year-end 2019, AM Best expects to see an increase in covenant waivers to avoid defaults following the COVID-19 pandemic.
The life/annuity segment reportedly maintains the largest share, about $1.2 trillion, or 84%, of total insurance industry holdings.
In the face of the prolonged historically low interest rate environment, insurers have supposedly looked to purchase private placements to earn higher returns than with publicly traded securities, but the spread has converged to within less than one percentage point since 2012.
The continued purchases of private placements have exceeded publicly traded bonds in each segment, increasing the share of private placement bonds as a percentage of total bonds.
Since 2009, AM Best says private placement bonds have seen their share of the bond portfolio increase to 35.5% from 24.9% in the L/A segment, the largest allocation of the three segments.
AM Best expects that many covenant waivers will be approved by insurers to avoid default, aiming instead to achieve better recovery rates, although if investors believe the issuing company’s financial woes result from bad decisions and mismanagement, term negotiation will prove more difficult.
The increasing allocations of private placements have not had a substantial effect on liquidity ratios nor the ability of companies to meet their policyholder obligations, the ratings agency says.
Companies with large exposures are characterised by strong credit shops to perform the necessary underlying analysis.
As part of an organization’s overall risk management practices, investments should be diversified and there should be no significant concentrations, whether by sector, investment strategy or issuer, AM Best says.