OLDWICK, N.J.--(BUSINESS WIRE)--As allocations to Schedule BA assets (BA assets) have been increasing for non-life, life and health insurers, there has been a correlating increase in its sub-components, namely investments in private equity (PE) and hedge funds (HF), according to a new A.M. Best special report. As interest rates remain persistently low, BA assets, or non-traditional assets, have provided insurers with the potential for higher returns to help mitigate the run off of higher portfolio returns.
This Best’s Special Report, titled, “Spotlight on Private Equity and Hedge Fund Exposure,” states that PE and HF investments combined for 26.3% of total BA assets (2014: USD 307.0 billion), or approximately USD 81.2 billion as of year-end 2014, across the U.S. life/annuity (L/A), property/casualty (P/C) and health industries, according to A.M. Best’s identified population. It should be noted that this compares with USD 2.7 trillion and USD 970.8 billion that the L/A and P/C industries invested in bonds, respectively. The L/A industry’s USD 56.5 billion exposure is the largest among the three industries, with 26.3% of BA assets invested in PE funds and another 7.4% allocated to HF. With shorter duration liabilities and generally higher liquidity needs, the P/C industry holds USD 23.1 billion in PE and HF, while the health industry invests USD 1.6 billion. The P/C industry had the largest increase in exposure, up 9.3% year over year in 2014, while the L/A industry increased 0.4% and the health industry had a 1.4% decrease. On an aggregated total industry basis, PE and HF exposure remains relatively modest as a percentage of capital and surplus, with the life insurance industry having the largest exposure at 13.5% in 2014.
A.M. Best does not draw the conclusion that all BA assets are risky, and will quantitatively and qualitatively decipher risks across individual asset classifications within this “catch-all” statement. The report aggregates PE and HF holdings that have been identified by companies within their annual statutory National Association of Insurance Commissioners (NAIC) statements, with numbers of 1 through 13 under the “type and strategy” column in Schedule BA, Part 1. The report notes that this puts material limits to the ability to use Schedule BA as an in-depth rating tool, as often this column has many line items left blank in company filings.
A.M. Best’s approach to investment analysis remains consistent across all asset classes, although there are some variations in additional analysis depending on asset type. However, PE and HF investments are less liquid and less transparent, and in periods of stress, can be correlated to each other and traditional asset classes. All these concerns are factored into the assessment of portfolio riskiness. A.M. Best remains committed to closely monitoring the rising trend in alternative investments and regularly reviews capital charges to ensure appropriate treatment of this growing asset class. At this point in time, the overall exposure is not excessive for most companies. However, the trend is up, and when added to other risky positions, the aggregate industry exposure to risky assets to capital and/or surplus is noticeable.
For a full copy of this special report, please visit: http://www3.ambest.com/bestweek/purchase.asp?record_code=237298.
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