AM Best: US L/A insurers shift toward mortgages and alternatives as bond yields

According to a recent report from AM Best, a credit rating agency, the bond portfolio yield for the US life/annuity (L/A) insurance industry rose to its highest point in ten years in 2024, increasing by 22 basis points to 4.79%.

However, AM Best notes that this rise came alongside a significant rebalancing of investment allocations.

The report highlights a decline of nearly seven percentage points in bond holdings since 2015, as insurers increasingly favoured mortgage loans and Schedule BA assets, which include private placements and alternative investments.

The Best’s Special Report, titled “US Life/Annuity Insurers Embrace Alternatives and Mortgages in 2024,” indicates that the segment’s overall portfolio yield climbed by over 25 basis points year-over-year, reaching 4.91%. A

M Best attributes this improvement to the reinvestment of proceeds from maturing bonds into newer, higher-yielding instruments, including mortgages issued at more favourable rates.

The agency also reports that net investment income for the life/annuity segment reached $246.9 billion in 2024, marking a 10% annual increase—slightly above the 9% gain recorded in 2023.

Mortgage loan holdings have grown steadily over the past decade and, according to AM Best, represented 14% of total invested assets by the end of 2024. The report flags some credit quality concerns amid this expansion.

“Mortgage loan holdings have nearly doubled in the last 10 years, although the quality of mortgages in good standing continues to deteriorate as economic conditions impact debt service coverage and loan-to-value ratios, in addition to residential mortgages constituting a greater share of the portfolio,” added Kaitlin Piasecki, Industry Research Analyst, Industry Research and Analytics, AM Best.

AM Best’s analysis also underscores a continued move into alternative investments. As insurers navigate a still-challenging interest rate environment, many have expanded their exposure to private equity and private credit to bolster portfolio performance.

“The majority of private credit lies in senior notes and term loans, but structured private credit, particularly collateralized loan obligations, has grown markedly,” commented Jason Hopper, Associate Director, Industry Research and Analytics, AM Best.

He continued: “The amount of private credit on L/A insurers’ balance sheets, as well as the expertise required to manage the risk exposure of these holdings, raises the question of how much larger allocations to private credit can become.”

AM Best concludes that while yield improvements have helped bolster returns, the evolving investment mix brings new complexities and risks that insurers will need to manage carefully.