In 2023, property & casualty (P&C) insurers in the United States reached record investment income levels, driven by a total of $2.7 trillion in invested assets.
As per an AM Best report, insurers were reassessing their investment portfolios amid ongoing interest rate hikes, recession risks, and early bear market indicators. The relatively short-tailed nature of many large lines led to shorter-duration investment portfolios.
As weather and catastrophe events, along with other challenges, have driven losses higher for P&C insurers, investment income has become increasingly important to offset poor underwriting results. The rebound in US equity markets and higher interest rates, leading to better yields, significantly boosted the P&C industry’s investment income in 2022 and 2023.
After more than a decade of persistently low interest rates, the Federal Reserve raised rates by 525 basis points in 2022 and 2023. This caused bond prices to drop below their carried values, but the well-matched and shorter-duration portfolios of most P/C insurers limited the overall impact.
Over the past 10 years, aggregate net underwriting income has been volatile and often negative across the industry, making investment income crucial to earnings. The industry has shifted to riskier assets in search of higher yields, balancing risk appetites with the need for higher returns in a changing economic environment.
Net investment income hit a record high of $73.9 billion in 2023, bolstered by the higher interest rate environment. In 2022, net investment income was skewed by a $10.8 billion intercompany distribution at a large reinsurer, affecting overall figures. Adjusted for this one-time transaction, the industry’s net investment income growth in 2023 would be nearly 20%.
Overall net yield, which declined steadily from 3.6% in 2012 to 2.6% in 2021, rose to 3.2% in 2022, the highest since 2014, due to the interest rate increase. The rise in investment income helped marginally offset unfavorable performance in lines such as auto insurance.
Bond portfolios remain the largest asset class for P&C insurers, but allocations declined from 55.7% in 2022 to 54.7% of invested assets in 2023, a low compared to the last decade. Common and preferred stock holdings, after a dip in 2022, grew to 27.9% of invested assets in 2023. These trends are largely driven by larger players, with Berkshire Hathaway accounting for over 40% of the segment’s invested assets in 2023.
“Aggregate net underwriting income has been volatile in the last 10 years—and often negative across the industry—and so investment income remains vital to earnings. Property/casualty carriers have had to balance their risk appetites with the need for higher returns when deciding on investment strategies in a rapidly changing economic landscape,” Helen Andersen, an industry analyst at AM Best said.
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