Property/casualty insurers in the U.S. have enjoyed favorable investment returns in recent years, fueled by investment gains from declining interest rates and equity market advances. However, future portfolio performance is pressured by reduced interest income from low portfolio yields and the fact that stocks currently are more fully valued.

Executive Summary

Even as interest rates have declined and equities have advanced, P/C insurers have maintained conservative investment positions, but competitive pressures and the expanded presence of insurers funded by alternative capital funding could change that, notes Fitch's James Auden. Here, Auden also provides a snapshot of P/C investment strategies in 2013.

These conditions prompt a question about future strategies: Will P/C insurers take more risk in investment allocation to sustain investment-related earnings?

From an operating income perspective, the contribution of investment earnings to overall profits has declined for some time. The long-term decline in interest rates has led to a reduction in the industry’s statutory portfolio yield by over 100 basis points since 2007 to 3.4 percent. While interest rates increased modestly in 2013, insurers’ investment yields are poised to decline further in the near term as the coupon rate on maturing bonds continues to materially exceed new money rates.

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