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posted on 15 January 2018

Reinvesting After The Crisis: Changes In The Fixed-income Portfolios Of Life Insurers

from the Chicago Fed

-- this post authored by Andy Polacek

The years following the Great Recession presented a unique set of challenges for life insurers even as the U.S. economic recovery began to gain momentum. Between the financial crisis in 2008 and the end of 2016, life insurers’ policyholder liabilities grew 25%, from $2.6 trillion to $3.2 trillion, while their preferred investment habitat, the fixed-income securities market (excluding Treasury securities), grew by only 3%, from $22.0 trillion to $22.1 trillion.

This was the only period since 1960 when the rate of growth in life insurers’ policyholder liabilities, and in turn their desire to increase holdings of fixed-income securities, exceeded the growth rate of the fixed-income market.2 Compounding the supply problem was the fact that other institutional investors, including pension funds, mutual funds, and bond exchange-traded funds (ETFs), increased their fixed-income holdings by 40%, a combined $1.7 trillion, over the same period.3 The Federal Reserve’s low interest rate policy and related quantitative easing (QE) bond-buying program added to these supply and demand pressures, helping to push down investment-grade corporate bond yields from 7.2% in 2008 to 3.5% in 2016, near their lowest levels in decades.4 This dynamic put life insurers in the difficult position of having to invest their increasing reserves into a slow-growing and competitive market.

Life insurers generally responded to this challenge by buying into fixed-income markets that experienced increases in new issuance and decreasing their holdings in shrinking markets, while taking into consideration credit and regulatory changes in the different fixed-income subsectors: private mortgagebacked and asset-backed securities (MBS/ABS), agency MBS, nonfinancial corporate bonds, financial corporate bonds, and municipal bonds. This Chicago Fed Letter explains the investment strategy of life insurers and how insurers have responded to the changes in fixed-income markets.

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