Credit Risk Rises as Insurers Become ‘Aggressive’11

U.S. property-casualty insurers are accumulating lower-rated bonds as near record-low interest rates limit investment income from higher-rated securities, JPMorgan Chase & Co. said.

The portion of corporate bonds in the insurers’ portfolios that are rated A or higher fell to 54 percent as of Dec. 31 from 60 percent at the end of 2005, JPMorgan analysts led by Eric Beinstein said in a report today. The analysts reviewed holdings of the 20 largest carriers.

“Over the past six years, P&C insurers have become significantly more aggressive with their portfolios,” Beinstein said. “Their allocations are now much closer to the market.”

Property-casualty companies build investment portfolios to back costs from auto accidents, natural disasters, lawsuits and other claims. The firms held about $1.5 trillion in assets at the end of last year, with $927 billion in fixed income, according to JPMorgan, which reviewed data from the Federal Reserve and National Association of Insurance Commissioners.

Allstate Corp., American International Group Inc. (AIG), and Travelers Cos., the largest publicly traded U.S.-based property-and-casualty insurers, have been pressured by declining yields on bonds. Fed Chairman Ben S. Bernanke has pledged to keep interest rates low through at least late 2014 to stimulate economic growth.

AIG, the bailed-out insurer, posted $1.15 billion in second-quarter investment income at its Chartis property-casualty insurer, up 1 percent from a year earlier. AIG altered its portfolio as the yield on the 10-year (USGG10YR) treasury fell to 1.65 percent on June 30 from 3.16 percent a year earlier.

The improvement in investment income reflects “redeployment of excess cash and short-term investments away from our concentration on non-taxable municipal bonds into higher yielding corporate and structured securities,” Chartis CEO Peter Hancock said in an Aug. 3 conference call.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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