Investment grade life insurance is an insurance policy that combines protection and investment benefits. The policyholder pays premiums, and a portion of the premium is invested in a portfolio of high-quality securities. The investment portfolio consists mainly of investment-grade US debt securities, such as corporate bonds, government bonds, and mortgage-backed securities. These securities are considered low-risk and have a higher credit rating than below-investment-grade securities.
The investment portfolio is managed by the insurer, who aims to generate a return on the investment while maintaining the safety and liquidity of the portfolio. The portfolio's performance affects the policy's cash value, which can be used to pay premiums, take out loans, or withdraw funds. The policy's cash value can also be used to provide a death benefit to the policyholder's beneficiaries.
Exposure to interest-rate volatility is a risk factor for investment grade life insurance. The insurer manages its exposure to interest-rate volatility by investing in fixed-income securities with different maturities and durations. The portfolio's duration is adjusted to match the policy's liabilities, such as the expected payouts of death benefits and policy loans. If interest rates rise, the value of the fixed-income securities may decline, but the insurer can reinvest the proceeds at higher rates.
Certain insurers, including some alternative investment manager (alt IM)-backed and affiliated insurers, have been vocal opponents of the change in the International Association of Insurance Supervisors (IAIS) capital rules for insurance companies. The IAIS proposed to increase the capital requirements for insurers investing in alternative assets, such as private equity and hedge funds. These insurers argue that the proposed rules would limit their ability to generate returns and provide value to policyholders.
China Life Insurance Co., Ltd. is one of the largest life insurance companies in China, with a market capitalization of over $100 billion. The company also has limited amounts of below-investment-grade investments. In 2021, China Life Insurance reported a net profit of $6.2 billion, up 9.1% from the previous year. The company's investment portfolio consists of debt and equity securities, including government bonds, corporate bonds, and stocks.
Massachusetts Mutual Life Insurance Company will move its direct investment grade private placement business to Barings, an asset management firm. The move will allow Massachusetts Mutual to focus on its core business of providing insurance and retirement solutions. "This is a natural subset of investment-grade private placements," said Tim Corbett, Managing Director and Head of Private Placements at Barings.
Capital Alliance Limited is a Sri Lankan investment manager that owns a majority stake in Insurance Services LP (KIS), a boutique asset manager that oversees approximately $22 billion in primarily investment-grade assets. KIS specializes in fixed-income investments, including corporate bonds, municipal bonds, and structured products.
Similarly, UK life insurers using the 'matching adjustment' can offset the impact of interest-rate changes on their solvency ratios by investing in long-term assets, such as infrastructure projects and mortgages. However, AT1 bonds and other banking investments have come under the spotlight due to their higher risk and complexity.
Insurance-linked securities (ILS) investment manager Twelve Capital believes that life insurers are less exposed to the risk of climate change than banks. "We believe banks and life-savings insurers to be more exposed to interest rates and credit risk, while life insurers have more longevity and mortality risk," said Sandro Kriesch, Head of ILS Portfolio Management at Twelve Capital.
In conclusion, investment grade life insurance is an attractive option for policyholders who seek both protection and investment benefits. The investment portfolio consists mainly of investment-grade US debt securities, and the insurer manages its exposure to interest-rate volatility. Some insurers oppose the proposed changes in the IAIS capital rules, while others focus on their core business of providing insurance and retirement solutions. Company profiles, such as China Life Insurance, Massachusetts Mutual Life Insurance, and Capital Alliance Limited, provide insights into the investment strategies of life insurance companies.
