The life and annuity insurance segment’s bond portfolio yield hit its highest level in the past decade in 2024, increasing 22 basis points to 4.79 per cent, a new AM Best report reveals.

At the same time, an increase in schedule BA assets and mortgage loans has come at the expense of bond portfolio allocations, which have fallen nearly seven percentage points since 2015.

AM Best’s report, US Life/Annuity Insurers Embrace Alternatives and Mortgages in 2024 stated that the life and annuity segment’s overall portfolio yield increased year over year by more than 25 basis points to 4.91 per cent as older maturing bonds were replaced with new bonds yielding higher rates and new mortgages issued at higher rates.

Net investment income for the life and annuity segment increased by 10 per cent in 2024 to $246.9 billion, slightly higher than the 9 per cent year-over-year increase recorded in 2023.

In addition, according to the report, mortgage loan portfolios have grown considerably over the past decade, and at year-end 2024 accounted for 14 per cent of invested assets.

“Mortgage loan holdings have nearly doubled in the last 10 years, although the quality of mortgages in good standing continues to deteriorate as economic conditions impact debt service coverage and loan-to-value ratios, in addition to residential mortgages constituting a greater share of the portfolio,” said Kaitlin Piasecki, a research analyst for AM Best.

The report noted that alternative asset allocations continued to grow as insurers seeking higher-yielding assets in the low interest-rate environment have expanded investments into private equity funds and alternatives such as private credit.

Jason Hopper, AM Best’s associate director, industry research and analytics, said the majority of private credit lies in senior notes and term loans. However, structured private credit, particularly collateralised loan obligations, has grown.

“The amount of private credit on life and annuity insurers’ balance sheets, as well as the expertise required to manage the risk exposure of these holdings, raises the question of how much larger allocations to private credit can become,” he said.