A.M. Best Briefing

Industry Interest in Non-Traditional Assets Continues

Awaiting rate increase, insurers seek yield through divesification

OLDWICK, N.J., May 27, 2015—Insurance companies’ interest in alternative assets continued to rise in the second half of 2014, according to a new A.M. Best briefing, which updates a related Best’s Special Report released in June 2014 on Schedule BA investments.

This reflects insurers’ desire to obtain yield through portfolio diversification away from traditional asset classes, particularly as a long-awaited rise in interest rates failed to materialize in the second half of 2014.

A.M. Best reviewed recent year-end 2014 statutory filings against some of the data provided in the June 2014 report. A.M. Best generally views this growth in alternatives exposure more of a trade-off in liquidity and transparency. However, A.M. Best’s overall investment analysis remains consistent as the briefing analyzed all asset classes for various concentrations, pricing sources (Levels I, II, III), impairments and management’s understanding of their use vis-a-vie their liabilities and capital.

Utilizing surplus, alternatives

In total, the U.S. property/casualty (P/C) segment carried nearly twice as much exposure as the U.S. life/health (L/H) segment, 8.5% compared with 4.5%, respectively, in 2014, as measured as a percentage of invested assets. Overall, P/C and L/H companies use this exposure somewhat differently.

A.M. Best generally views this growth in alternatives exposure more of a trade-off in liquidity and transparency

P/C companies are generally utilizing their surplus positions to support investments into alternative assets, whereas many L/H companies use not only surplus, but also use alternatives to back longer dated liabilities with less liquidity needs.

By type, most of the growth for L/H companies was in common stock like exposures, such as hedge funds and private equity, whereas P/C companies primarily saw a rise in “joint-other,” which includes Everest Reinsurance Company’s Mt. Whitney Securities LLC transferred over into Schedule BA in March 2014 and State Farm Insurance Company’s EMLP, LLC, an investment vehicle created in September 2014. A.M.

Best measures exposure as a percentage of total capital (L/H companies) and policyholders’ surplus (P/C companies) as well. This measurement shows that the P/C industry has remained flat at around 20%, while L/H companies continue to grow exposure-to-total capital and ended 2014 at roughly 40%.

For the full copy of this briefing, please visit here.

To access the June 2014 special report, please visit here.


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