A.M. Best Special Report: Schedule BA Investments – Behind Their Rising Trend

OLDWICK, N.J.--()--For the past few years, the property/casualty (P/C) and life/annuity sectors of the U.S. insurance industry have been increasing their allocations to Schedule BA investments – a “catch-all” schedule for nontraditional asset classes, including other long-term invested assets such as: private equity and hedge funds, surplus notes, and secured and unsecured loans, according to a new A.M. Best special report.

The report, titled “Schedule BA Investments – Behind Their Rising Trend,” states that the increased allocations to nontraditional assets is an important trend that warrants monitoring, as A.M. Best expects that these higher allocations to BA securities likely will continue without a meaningful increase in interest rates.

In 2007, the life/annuity insurance industry saw its first substantial increase in allocations to BA assets, to 3.4% of total investments from 2.7% a year earlier. The 2013 year-end allocation of 4.2% represented 38.2% of total capital, including asset valuation reserves. The P/C industry has experienced similar trends: BA assets spiked to 5.6% of invested assets in 2007, before a slight contraction during the financial crisis. In 2013, BA assets increased to 7.7% of total investments.

While A.M. Best acknowledges the yield-enhancing nature of the BA asset class, the company also notes the potential volatility caused by the uncertain market values of many BA investments. As the first half of 2014 ended, the forecast anticipated by most insurers for slowly rising interest rates had not occurred. Although this issue generally is assumed to concern the life/annuity industry, P/C insurers are experiencing similar impacts.

Hampered by the limited transparency of the schedule, A.M. Best continues to spend additional time with companies’ management, as part of the enterprise risk management review to ensure they understand the additional investment risk they’re assuming. With Schedule BA assets steadily increasing, there may be less certainty in determining valuations and credit quality. A.M. Best believes at some point this could lead to insurers underestimating their investment risks. Currently, the growing exposure is concentrated among the larger companies that hold higher levels of capital and liquidity to absorb the increased asset risk.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=226395.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best Co.
Jason Hopper
Industry Research Analyst,
Credit Rating Criteria,
Research and Analytics
(908) 439-2200, ext. 5016

or
Ken Johnson, CFA
Assistant Vice President,
Senior Financial Analyst
Industry Research
(908) 439-2200, ext. 5056

ken.johnson@ambest.com
or
Christopher Sharkey
Manager, Public Relations
+(1) 908 439 2200, ext. 5159

christopher.sharkey@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644

james.peavy@ambest.com

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Contacts

A.M. Best Co.
Jason Hopper
Industry Research Analyst,
Credit Rating Criteria,
Research and Analytics
(908) 439-2200, ext. 5016

or
Ken Johnson, CFA
Assistant Vice President,
Senior Financial Analyst
Industry Research
(908) 439-2200, ext. 5056

ken.johnson@ambest.com
or
Christopher Sharkey
Manager, Public Relations
+(1) 908 439 2200, ext. 5159

christopher.sharkey@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644

james.peavy@ambest.com