Executive Summary

In 2024, the U.S. Property and Casualty (P&C) insurance industry’s net investment income reached a decade high of 3.63%, supported by elevated interest rates and increased equity dividend income.
Over the past three years, one large insurer has notably influenced industry asset allocations by reducing its exposure to Schedule BA assets and equities, while increasing holdings in cash and short-term investments. Excluding this outlier, the industry’s overall asset mix has remained relatively stable.  
Meanwhile, the fixed income portfolio experienced a continued increase in book yield, along with improved credit quality and stable duration. The industry’s allocation to tax-exempt municipal bonds declined steadily, replaced by growing investments in corporate bonds and structured securities.

Net Investment Income (NII) Increased, Driven by Higher Book Yields and Equity Dividends

Table 1 presents the total cash and investments of the P&C industry, along with gross and net earned investment income. In 2024, net investment income rose significantly, reaching a decade high of 3.63%. Total cash and investments increased by 7%, reaching US$2.45tn. Table 2 provides a breakdown of the industry’s earned investment income by major asset classes. The contribution from equities rose from 11% to 14%, supported by higher dividend income. Notably, the contribution from cash and short-term investments increased to 15%, surpassing the contributions from both equities and Schedule BA assets.

Bond Allocation Remained Dominant despite Gradual Decline

Chart 1 illustrates the industry’s statutory asset allocation across broad sectors over the past decade. Bonds continued to represent the majority of total invested assets, although their allocation declined from 61.5% to 54.7% over the period. Equities, the second-largest asset class, saw their allocation decrease from 28.8% in 2023 to 25.0% in 2024. This shift was driven by Berkshire Hathaway (BRK), reallocating from equities to cash and short-term investments, resulting in a record-high cash and short-term allocation of 11.5% of total invested assets for the industry.  Chart 2 shows that when BRK is excluded, the industry’s asset allocation remained relatively stable over the past three years.

Risk Asset Allocation Declined, Driven by Equities

The industry’s allocation to risk assets, measured at fair/market value under statutory accounting, continued its downward trend after peaking at 87.8% of surplus at year-end 2021 (see Chart 3). The decline observed in 2024 was primarily driven by a large insurer (BRK) reducing their equity exposures. However, as illustrated in Chart 4, when BRK is excluded, the industry’s overall risk asset allocation has remained relatively stable over the past three years. 

Fixed Income Allocation: Growth in Structured Securities and Private Placements, Decline in  Tax-Exempt Municipals

Chart 5 illustrates long-term trends in fixed income sector allocations¹ over the past decade. Corporate bond allocations have stabilized after reaching a record high in 2023, comprising over one-third of the industry’s fixed income holdings by year-end 2024. In contrast, the tax-exempt municipal bond sector has experienced a consistent decline, with the pace of reduction accelerating following the 2018 tax law changes. As of the end of 2024, tax-exempt municipals accounted for less than 10% of fixed income allocations.

Within structured securities — which include asset-backed securities (ABS), residential mortgage-backed securities (RMBS), and commercial mortgage-backed securities (CMBS) — Agency RMBS and ABS have shown steady growth over the past five years and now represent the two largest subsectors. CMBS allocations, by comparison, have remained relatively flat during the same period.

Taxable municipal bonds have accounted for slightly more than 5% of the P&C industry’s fixed income portfolio over the past five years, though they have experienced a modest decline since 2022. This decline primarily reflects reduced issuance in the broader taxable municipal bond market. Government/Agency securities remained stable at just over 15% in 2024, making them the second-largest sector within fixed income holdings. Private placements have also increased over the past decade, reaching 3.2% of fixed income allocations in 2024.

Another Year of Book Yield Increase, Though Momentum Slows

The industry’s book yield increased by 35 bps in 2024, supported by persistently elevated interest rates. By year-end, the book yield reached 4.20%, the highest level in the past decade. This follows gains of 64 bps in 2022 and 54 bps in 2023 (see Table 3). In 2024, book yields rose across most fixed income sectors, with Government/Agency securities and RMBS leading the increases.

However, higher market yields continued to weigh on the fair or market values of existing holdings, which have remained below their statutory book values since 2022. As insurers locked in higher yields, they also realized investment losses in 2022, 2023 and 2024 (see Table 4).

To manage the trade-offs between yield enhancement and realized losses, insurers are encouraged to adopt a holistic enterprise framework—one that integrates underwriting characteristics and business profiles into asset allocation decisions. This approach is especially critical as the industry navigates ongoing insurance market cycles and heightened economic, geopolitical, and capital market volatility.

Credit Quality Improved Amid Higher Interest Rates

Chart 6 highlights trends in the credit quality of fixed income portfolios. Prior to 2022, the prolonged low-interest rate environment prompted insurers to take on greater credit risk, reflected in rising allocations to BBB-rated and below-investment-grade bonds. These allocations peaked in 2021, but the trend has since reversed.

Beginning in 2022, the Federal Reserve’s aggressive rate hikes created opportunities for insurers to enhance portfolio quality while still achieving attractive yields. As a result, the industry increased allocations to higher-rated securities, particularly those rated AAA and A, while reducing exposure to BBB and below-investment-grade holdings. This shift was supported by increased investments in Government/Agency bonds, ABS, and Agency RMBS, as shown in Chart 5, all of which contributed to the overall improvement in credit quality.

Duration Remained Range-Bound

Table 5 presents option-adjusted duration (OAD) by fixed income sector, based on CUSIP-level holdings extracted from Schedule D statutory filings. The data excludes bonds held at the holding company level, as well as derivatives and private placements. Since 2018, the industry’s aggregate OAD has remained relatively stable despite evolving market conditions.

Key Takeaways

• Net investment income reached a decade high of 3.63% in 2024, driven by elevated yields and increased equity dividend income.
• Bonds remained the dominant asset class, though their share of total invested assets continued to decline. Notably, the contribution to earned investment income from cash and short-term investments surpassed that of both equities and Schedule BA assets, following a significant reallocation by a major insurer.
• Within the fixed income portfolio, allocations to tax-exempt municipal bonds have steadily declined, now comprising less than 10% of the total. In contrast, investments in corporate bonds and structured securities have steadily increased.
• The industry’s book yield rose consistently, up 64 bps in 2022, 54 bps in 2023, and 35 bps in 2024, reflecting a sustained upward trend. Over this period, credit quality improved while portfolio duration remained stable.

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Endnote

¹ Unlike the earlier exhibits, this and subsequent tables and charts do not present results both including and excluding BRK, as its influence on fixed income trends is less pronounced than its impact on equity allocations and Schedule BA assets.