Record Investment Income Levels Reached by US Property & Casualty Insurers in 2023

In 2023, major strides were made by Property & Casualty (P&C) insurers in the United States as they reached unprecedented levels of investment income. The total invested assets by these insurers soared to a staggering $2.7 trillion, fueling this remarkable achievement.

The latest report from AM Best highlighted how insurers were meticulously reevaluating their investment portfolios amidst the backdrop of ongoing interest rate hikes, looming recession risks, and early signs of a bear market. The industry’s inclination towards shorter-duration investment portfolios was notably influenced by the relatively short-tailed nature of numerous large lines.

With escalating losses driven by weather calamities, catastrophes, and various other hurdles that pushed up costs for P&C insurers, investment income became an increasingly vital component to offset poor underwriting results. The resurgence of US equity markets and the uptick in interest rates, consequently leading to improved yields, significantly bolstered the investment income of the P&C industry in 2022 and 2023.

After enduring more than a decade of enduringly low interest rates, the Federal Reserve implemented an extensive 525 basis points rate hike across 2022 and 2023. While this adjustment caused bond prices to dip below their carried values, the well-aligned, shorter-duration portfolios of most P&C insurers managed to mitigate the overall impact.

Over the past decade, the aggregate net underwriting income within the industry has been tumultuous, oftentimes veering into negative territory, underscoring the pivotal role played by investment income in bolstering earnings. Amidst a changing economic climate, insurers have delved into riskier assets in pursuit of higher returns while delicately striking a balance between risk appetites and profitability needs.

The net investment income pinnacle hit an all-time high of $73.9 billion in 2023, primarily propelled by the burgeoning interest rate scenario. Noteworthy is the fact that the net investment income for 2022 exhibited distortions due to a $10.8 billion intercompany distribution at a prominent reinsurer, significantly influencing the overall figures. Upon adjusting for this one-time occurrence, the growth in net investment income for the industry in 2023 would spike by almost 20%.

With an environment characterized by higher interest rates, the overall net yield, which had witnessed a steady decline from 3.6% in 2012 to 2.6% in 2021, surged to 3.2% in 2022, marking the highest figure since 2014. This surge in investment income subtly offset the unfavorable performance seen in lines like auto insurance.

While bond portfolios remain the top-tier asset class for P&C insurers, their allocations dwindled from 55.7% in 2022 to 54.7% of invested assets in 2023, marking a low compared to the last ten years. On the other hand, common and preferred stock holdings, after a dip in 2022, ballooned to 27.9% of invested assets in 2023. These financial trends predominantly driven by major players, with leading the pack, commanding over 40% of the segment’s invested assets in 2023.

AM Best’s industry analyst, Helen Andersen, emphasized the volatile performance of aggregate net underwriting income in the past decade, which often skewed towards negativity, hence underlining the undisputed importance of investment income in fortifying earnings. P&C carriers have had to juggle risk appetites and the quest for enhanced returns, navigating through a swiftly evolving economic landscape in making strategic investment decisions.