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Berkshire Hathaway best suited among insurers to shift bonds to higher yields

Among the U.S. insurers with the largest bond portfolios, Berkshire Hathaway Inc. entered 2018 with the best mix of investments to quickly take advantage of rising interest rates, according to an S&P Global Market Intelligence analysis.

As of Dec. 31, 2017, nearly 88% of Berkshire's bond portfolio, or $53.41 billion of a total of $60.75 billion, would be maturing within a year, by far the highest percentage of such bonds among the insurance industry's top portfolio bondholders.

As the Federal Open Market Committee added more lift to interest rates with its latest increase to the benchmark rate, Berkshire will be in prime position to take advantage of maturing bonds and shift its bond portfolio mix into higher-yielding newer issuances within the next five years, assuming interest rates continue to rise. Another 9%, or $5.47 billion of its bond portfolio, was set to mature between one and five years.

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No other insurer is close to having so large a percentage of its bond investments maturing in the next few years. Among the instruments in Allstate Corp.'s bond portfolio, 12.2%, or $3.94 billion of its $32.33 billion total, was set to mature within a year. Another 56.75% of the portfolio, representing $18.35 billion, will mature between one and five years out.

Among life insurers, MetLife Inc. had the largest percentage of bond investments maturing within the next few years. Of its bond portfolio of $166.94 billion, $18.15 billion, or 10.87%, would mature within a year, and $50.49 billion, or 30.24% of its portfolio, would finish paying out between one year and five.

The company is hoping for a prolonged macroeconomic growth cycle to send interest rates ever higher, CFO John Hele said during a Feb. 14 conference call.

"As a large investor in the U.S. fixed income market, MetLife will benefit if higher economic growth leads to higher interest rates and an extension of the credit cycle," Hele said, according to a transcript of his remarks.

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Gradually increasing interest rates are good for insurers, according to S&P Global Ratings analyst Deep Banerjee. But the Fed action impacts short-term rates; with a yield curve that is relatively flat, long-term rates might take some time to move up, Banerjee said in an interview.

Rising rates will turn unrealized gains on bond portfolios to losses, but that should not impact the investment strategies for life insurers, Banerjee said.

"The purpose of most of the investments for these insurers that have long liabilities is to hold them to maturity," he said.

Aflac Inc.'s portfolio is one of the longest-horizoned among life and P&C insurers. Aflac has increased the duration of its U.S. dollar-denominated holdings to offset conditions in the investment environment in Japan, where it writes most of is business.

Of Aflac's $104.47 billion bond portfolio, just $2.75 billion, or 2.63% of the companies bonds, were to mature in 2018, while $8.86 billion, representing 8.48% of its portfolio, was set to mature between one and five years. Aflac had the largest portion of its bond portfolio on the S&P Global Market Intelligence table that would be maturing in more than 20 years, and a majority of its bonds mature between 10 years and 20 years from now.

The insurance industry's largest bondholder, TIAA CREF, had a portfolio worth $192.60 billion. The year 2018 will see 5.05% of its bonds reach maturity.

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