Putting Higher Yields to Work: An Opportunity for Insurers

NEPC contends that the meaningful rise in interest rates in 2026 has created an opportunity for insurance companies to capture higher yields and strengthen their investment portfolios. The firm recommends that insurers selectively sell lower-yielding securities and reinvest the proceeds into higher-yielding bonds. NEPC acknowledges that these rotational programs typically generate realized losses, but argues that incremental income from replacement securities can offset those losses over time while improving forward-looking book yield and net investment income.

Long-term Treasury yields have risen meaningfully in 2026. According to NEPC, the move has been driven primarily by higher real interest rates rather than a meaningful increase in inflation expectations, with contributing factors including strong nominal U.S. growth, higher oil prices tied to an escalation in the U.S.-Iran conflict, rising Japanese bond yields, and Federal Reserve policy uncertainty. The 10-year Treasury yield stood at 5.29% as of 9/30/2026, per FactSet. Corporate credit spreads remain at historically tight levels. NEPC notes that triple-B corporates yielded 6.24% against 5.84% for double-A corporates, a 40 basis point differential that compares with 46 basis points at the start of the year and a historical range of 80–120 basis points. NEPC views this combination as allowing insurers to improve credit quality while earning higher all-in yields without reaching for additional spread. The firm also suggests that modestly extending duration may be worth considering, as it can offset some of the yield reduction from moving up in quality and add total return potential if rates decline.

NEPC advises that rotational programs be deliberate and selective rather than a broad sale of every bond trading below book value. Insurers should identify holdings whose income, credit profile, or portfolio role no longer justify retention, then evaluate replacements on yield, quality, duration, liquidity, capital treatment, and fit with liabilities and investment policy. Program size should reflect a loss budget established with internal accounting teams. For insurers using third-party fixed-income managers, NEPC recommends engaging portfolio management teams directly, reviewing pre- and post-trade portfolio characteristics, and adjusting benchmarks as needed.

The central metric is the payback period, calculated as realized loss divided by incremental annual income from the replacement security. NEPC states this should use actual reinvestment proceeds rather than original par value and should account for taxes, transaction costs, statutory accounting treatment, and expected holding period. NEPC suggests reviewing the full bond portfolio, with particular attention to securities purchased during the low-rate environment of 2020 and 2021. The firm's illustrative example assumes a 1.25% rate increase on starting par value and is stated to be hypothetical and not representative of any NEPC portfolio or product.