Long term strategy remains clear
by Hitesh Khatri & Terry Leone
reprinted with permission from SNL Financial
The U.S. insurance industry disposed of almost $4 billion in U.S. Treasurys on a net basis in the first half of 2013, with Fidelity & Guaranty Life leading the way.
The U.S. insurance industry held a total of $219.15 billion in Treasurys at year-end 2012, with more than half of this amount, $131.05 billion, held by the life insurance sector. The $3.91 billion sell-off represents 1.78% of the industry’s total at the start of 2013. While this amount is noteworthy, it is clear that the industry still has a heavy reliance on long-term Treasurys.
Fidelity & Guaranty is owned by private equity firm Harbinger Capital Partners LLC. In the first half of 2013, lead insurance company Fidelity & Guaranty Life Insurance Co. sold $1.78 billion in Treasurys. This total represented virtually all of the group’s Treasury holdings and was by far the largest disposition without any kind of purchase to replenish its supply.
SNL reviewed the bond transactions reported in Schedule D, Parts 3 and 4 for all U.S.-based insurance companies that filed quarterly statements with the NAIC. SNL filtered out transactions pertaining to U.S. Treasury bonds, which start with CUSIP 9128; aggregated the purchases and disposals by top-level entity; and calculated the difference in disposals and purchases for each top-level entity. The largest absolute values of these represent the largest net purchases and net disposals of U.S. Treasurys for each group of companies and are displayed in the table below.
Fidelity & Guaranty historically has not been a major owner of U.S. Treasurys. From 2008 to 2011, when many companies were ramping up their investments in these securities, the Maryland-based life and annuity writer never reported owning more than $240 million, representing less than 2% of its gross assets during this time. In 2012, the company shifted its investment focus and purchased in the latter half of the year a handful of two-year U.S. Treasury bonds, totaling $2.19 billion in face value. A portion of those purchases were sold for a minimal gain before the end of year, but at Dec. 31, 2012, Fidelity & Guaranty still held U.S. Treasurys valued at $1.84 billion. The company continued its sell-off of the Treasury notes in 2013 to Bank of America Corp. and other entities. It has bulked up on investment-grade corporate bonds, paying $3.54 billion for a wide variety of these bonds in 2013.
The move to Treasurys may have taken a bite out of Fidelity & Guaranty’s profits in 2012. From 2008 to 2011, Fidelity & Guaranty posted robust net yields on invested assets in each year. Yields on a statutory basis, excluding capital gains, ranged from 5.29% to 5.87% for each year. In 2012, after the large purchases, the lower yield notes helped to contribute to a lower net yield of 4.69%. Meanwhile with Treasury rates beginning to rise, and the notes’ potential appreciation hampered, Fidelity was unable to make up the lower interest payments with higher gains. At various points in 2013, the company has sold more than 97% of the notes it carried over from 2012 for a relatively small realized gain of approximately $580,000.
Three other major insurers shed in excess of $1 billion, though the sales did not impact the companies’ overall portfolios as dramatically as in the case of Fidelity & Guaranty. TIAA-CREF, Massachusetts Mutual Life Insurance Co. and the U.S.-based subsidiaries of Swiss Re Ltd. each reduced U.S. Treasury bond holdings in the first half of 2013. Since 2008, each of these companies have relied much more on Treasurys than Fidelity & Guaranty. In addition, these companies disposed of a large amount of bonds but also still made significant purchases.
While the industry as a whole began to pull back from Treasurys, there were still some major purchasers. MetLife Inc. was the only entity whose acquisitions exceeded dispositions by $1 billion. In terms of sheer dollars, the New York-based life insurance giant purchased the most bonds. Adding in both the life and P&C subsidiaries, MetLife purchased $26.58 billion while disposing of $25.56 billion. The life subsidiaries were responsible for the bulk of the activity. In recent years, the life subsidiaries have made a massive shift in Treasurys, increasing holdings from $11.39 billion at the end of 2008 to $29.93 billion at the end of 2012, an average increase of more than 25% per year. The rising interest rate environment seems to have slowed this activity.
The next largest net purchaser of U.S. Treasurys was the U.S. branch of Dutch insurer AEGON NV, with net acquisitions of $926.6 million in the first half of 2013. While the net increase in Treasury bonds was comparable to MetLife’s, the scale of activity was much smaller. AEGON’s U.S. subsidiaries purchased $1.41 billion while disposing of $482.8 million. The vast majority of the activity was executed by Transamerica Life Insurance Co. The Iowa-based company purchased $1.06 billion in the first half of 2013 while receiving $480.8 million for dispositions. These values represented 75% of the purchases and more than 99% of Treasury disposals by AEGON-owned U.S. insurers.