US insurers purchase corporate bonds in market 'raining gold'

US insurers, holders of more than $2.2 trillion in corporate debt, bought the bonds at the fastest pace in five years in 2009, taking advantage of a market that Warren Buffett said was “raining gold.”

Insurers’ net purchases of corporate bonds climbed to $153 billion in 2009, with the greatest portion coming in the first quarter when yields were at their highest of the year, according to Federal Reserve data released last week. That compares with outflows of $59 billion in 2008, and accounts for the biggest inflows for the industry since $172 billion in 2004.

“It has paid off very nicely,” said Judy Greffin, chief investment officer for Allstate Corp., whose corporate-debt holdings swelled by 20 per cent last year to $33.1 billion. “With the benefit of hindsight, I would have loved to have bought more.”

A corporate-debt rally helped insurers including MetLife Inc and Prudential Financial Inc. to recover capital lost in the housing and stock market slumps of 2008 and early 2009. Life insurer inflows were more than eight times those of property-casualty companies in 2009. Buffett, the property-casualty industry’s most visible executive, lamented that he didn’t invest enough in the debt.

Corporate and municipal bonds “were ridiculously cheap relative to US Treasuries” in early 2009, Buffett, Berkshire Hathaway Inc’s chief executive officer, said in an annual letter to investors on February 27. “Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”

Returns on corporate debt including reinvested interest totaled 26 per cent last year after an 11 per cent loss in 2008, according to Merrill Lynch’s US Corporate & High Yield Master index. Life insurers may spend as much as $100 billion on corporate debt in the next 18 months, Barclays Capital credit strategists Matthew Mish and Alex Gennis wrote in a March 12 report.

Allstate, the biggest publicly traded US home and auto insurer, cut back on commercial real estate and municipal bonds to buy corporate bonds. Of the $100 billion portfolio managed by Greffin, almost a third was corporate debt as of December 31.

“If you don’t like credit risk, you should not own our stock,” Tom Wilson, CEO of the Northbrook, Illinois-based company, said in an interview in August.

Insurers were joined in the market by mutual funds, which had $144 billion in inflows last year. Households and nonprofit organizations had $149 billion in outflows, and foreign banking offices in the US had $156.9 billion of outflows, according to the Fed’s report. The Fed data for corporate debt includes some asset-backed securities.

MetLife acquired corporate debt last year even as it wrote down the value of existing holdings. Its $358 million in corporate-debt impairments in the first quarter of 2009 accounted for almost half of the firm’s total credit-related writedowns in the period. The New York-based company had net losses in the first three quarters last year, and after each period CIO Steven Kandarian reiterated to investors that he was buying more corporate debt.

The extra yield investors demand to own US corporate debt instead of Treasuries fell 520 basis points last year, a record rally in spreads, Merrill data show. Spreads were at 262 basis points as of yesterday, compared with 797 basis points a year earlier.

Life insurers, which can hold policyholder premiums for decades before paying claims, need to earn returns on those funds to pay workers, remunerate investors and ultimately satisfy customers.

Companies that were shut out of debt markets during the credit freeze returned to selling bonds in 2009 as demand strengthened. Firms issued $1.2 trillion of dollar-denominated bonds in 2009, according to data compiled by Bloomberg. That’s the most since at least 1999, and a 42 per cent jump from 2008, when Lehman Brothers Holdings Inc’s bankruptcy prompted investors to withhold debt financing.

“This trend could continue as long as this asset class makes sense,” said Rajeev Sharma, who oversees $1.4 billion of investment-grade debt at First Investors Management Co in New York. “So far, corporate credit is still the asset class of choice.”