US Insurers Make Most Of “Raining Gold” In The Corporate Bond Market (BRK.A, ALL)

Bloomberg reports that in an annual letter to investors on February 27 Warren Buffett, the Chief Executive Officer of Berkshire Hathaway Inc. (NYSE: BRK.A), had said that Corporate and Municipal bonds “were ridiculously cheap relative to US Treasuries” in early 2009. He had added “Big opportunities come infrequently. When it is raining gold, reach for a bucket, not a thimble.”

U.S. insurers seem to have made most of this ‘raining gold.’ They are holders of more than $2.2 trillion of corporate bonds. According to data released by Federal Reserve, last week the insurers made a net purchase of corporate bonds amounting to $153 billion in 2009. Most of these purchases happened in the first-quarter when the yields were at the highest during the year. In comparison, there were net sales of $59 billion in 2008 and this is the second highest inflows for the industry after $172 billion in 2004.

The corporate debt rally gave insurers an opportunity to recover the capital lost in the housing and stock market downturn of 2008 and early 2009. As Judy Greffin, Chief Investment Officer with Allstate Corp. (NYSE: ALL), said, “It has paid off very nicely. With the benefit of hindsight, I would have loved to have bought more”. Their corporate debt holdings went up by 20% last year. They cut back on real estate and municipal bonds and invested in corporate bonds. According to Merrill Lynch’s U.S. Corporate & High Yield Master Index, the returns on corporate debt, inclusive of reinvested interest, was at 26% last year as compared to 11% in 2008. During the credit freeze many companies were out of the debt market. However, as demand strengthened they came back to selling bonds in 2009.

According to Bloomberg, firms have issued $1.2 trillion of bonds in 2009. Merrill Lynch’s data shows that the spread that investors demand while owning U.S. corporate debt in place of Treasuries fell by a record 520 basis points last year. Corporate Bond’s spread over Treasuries was at 262 basis points yesterday in comparison with 797 basis points a year back.

Matthew Mish and Alex Gennis, credit strategists at Barclays Capital, wrote in a March 12 report that life insurers may spend as much as $100 billion on corporate debt in the next 18 months. According to Rajeev Sharma, who is in charge of $1.4 billion of investment-grade debt at First Investors Management Co., in New York, “This trend could continue as long as this asset class makes sense. So far, corporate credit is still the asset class of choice.”