US insurers built up holdings of shaky bank loans in 2019

Total bank loans held by US insurers hit $63 billion at end-2019, an increase of 18% on the year prior. Four-fifths of these were junk rated, with 11% assigned a CCC credit rating, data from the National Association of Insurance Commissioners (NAIC) shows.

The percentage of loans with a BB or B credit rating climbed to 68% at end-2019, up from 64% the year prior. Over three-quarters of bank loans were held by life insurers, with the very largest – those with over $10 billion in assets – accounting for $46.8 billion alone.

The credit quality of leveraged loans, those of shaky credit quality, has deteriorated since the onset of the coronavirus crisis, the NAIC noted, with those rated B and lower making up 55% of the total at end-April, compared to 47% the year prior. Those rated CCC+ and below made up almost 13% of the total, up from 8% in February 2020.


What is it?

The NAIC’s Capital Markets Bureau “monitors developments and trends in the financial markets generally, and specifically with respect to the insurance industry”. It publishes periodic specialist reports to regulators and the public, offering insights into issues that could affect insurance company investment portfolios.

Why it matters

Insurers are attracted to risky bank loans and collateralised loan obligations (CLOs) because of their high yields and immunity to interest rate risk. Because they pay floating rates, they became even more popular in recent years as the Federal Reserve hiked the base rate.

However, with the onset of the coronavirus crisis, the default risk of these loans has surged, leaving insurers vulnerable to big losses that could eat into their equity capital. That most of these loans are concentrated at gigantic life insurers with well-diversified portfolios should give regulators some comfort. But smaller firms could find themselves in distress should their leveraged loan portfolios implode, a not-too-unlikely prospect should the economic fallout of the pandemic prove long-lasting.

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