U.S. life insurance companies substantially increased their holdings of collateralized loan obligations between 2011 and 2013, according to Fitch Ratings.
Fitch compiled information from statutory reports for 35 insurance groups showing that CLOs represented 33% of their total portfolios of asset-backed securities at year-end 2013. That’s up from 21% in 2012 and 18% in 2011.
Fitch did not provide absolute numbers for insurers’ CLO holdings; but asset-backeds as a whole represented 24% of total fixed-income portfolios, and fixed-income securities represented 84% of total invested assets.
Other kinds of investments in the asset-backed bucket included agency pass-throughs, commercial mortgage-backed securities, non-agency RMBS, and asset-back securities (ABS), among others.
Fitch estimates these results represent approximately two-thirds of the total life insurance industry's general account invested assets.
The rise in CLO investments corresponds with a boom in issuance. Some $82 billion of CLOs were printed in 2013, up 48% from 2012, according to Thomson Reuters.
Notably, the rise in allocation by insurers took place even before regulations making CLOs less attractive to banks took effect in December 2013.
These insurers also put plenty of money to work directly into commercial loans, which accounted for 63% of bond portfolios at the end of 2013. The credit quality of these corporate bonds was generally high with an average credit rating in the 'A'/'BBB' range. Approximately 10% of corporate securities were below investment-grade, the type of loans that back CLOs.
Overall quality of commercial loan portfolios remained "solid," according to Fitch. Ninety-six percent of commercial loans had loan-to-values below 80% at year-end 2013, up from 94% at year-end 2012 and 91% at year-end 2011. Debt service coverage ratios were also strong; only 4% of commercial mortgage loans had DSCRs below 1.0x.