A.M. Best Special Report: Structured Security Allocations Down, Caution Remains

OLDWICK, N.J.--()--Structured security holdings of U.S. insurance companies as a percent of total bonds have been steadily declining for the past few years and now account for 22.6% of total industry bonds as of year-end 2014, a decline from a high of 37.3% reported in 2007, according to a new A.M. Best special report. The Best’s Special Report, titled, “Structured Security Allocations Down, Caution Remains,” states that the decline has been felt most by the life/annuity (L/A) segment, which has seen its structured security exposure decline to 24.1% in 2014 from 43.0% in 2007.

The report points to a significant drop in supply as the chief cause for this decline. Mortgage-backed securities (MBS) were one of the leading causes that led to the financial crisis and insurers experienced unprecedented amounts of realized and unrealized losses as well as complete write-downs.

For insurers, structured securities provide an opportunity for garnering a high return without dropping down in credit quality, while also further diversifying their portfolios. These securities are created from the bundling of mortgages, credit card loans, home equity loans, auto loans and other assets, allowing the holder of the security to receive payments that depend primarily on cash flow from those assets. The report also notes that in early 2015, A.M. Best conducted a survey on current investment strategies to navigate through the prolonged low interest rate environment. In that survey, 6.0% of total respondents stated that they anticipated increasing allocations to structured securities in 2015.

Some of the highlights from this report include:

  • 7.4% of health respondents in the A.M. Best survey anticipated increasing allocations to structured securities, while 6.6% of L/A and 5.6% of property/casualty (P/C) stated they had the same investment strategy initiative;
  • When measuring by capital size, larger companies were generally more willing to increase their allocations to structured securities: 7.1% of respondents with more than $1 billion of capital anticipated increasing their structured security holdings compared with 4.1% of companies with less than $20 million of capital;
  • The L/A industry holds the predominant share of structured securities, ranging from 76%-79% over the past 10 years, while the P/C industry accounts for around 20% and health around 2%-3%. Since 2005, holdings in structured securities have remained over $800 billion, with the largest increase of 11.7% being reported in 2011; and
  • The health industry’s MBS allocations in 2014 represented 89.5% of total asset-backed securities, while the P/C and L/A segments’ allocations made up 70.0% and 69.6%, respectively.

A.M. Best remains committed to closely monitoring the trend in structured securities, especially given the volatile historical performance these investments have had, as evidenced during the 2008-2009 financial crisis, when many of these securities were impaired, causing major losses for numerous companies, or severely impaired companies’ liquidity positions.

For the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=242703.

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 © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best Company
Jason Hopper
Senior Industry Research Analyst – Credit
Rating Criteria - Research and Analytics
(908) 439-2200, ext. 5016
jason.hopper@ambest.com
or
Christopher Sharkey
Manager, Public Relations
(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

Contacts

A.M. Best Company
Jason Hopper
Senior Industry Research Analyst – Credit
Rating Criteria - Research and Analytics
(908) 439-2200, ext. 5016
jason.hopper@ambest.com
or
Christopher Sharkey
Manager, Public Relations
(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