A.M. Best Special Report: High-Risk Asset Growth Derived Mainly From Larger U.S. Life/Annuity Insurers

OLDWICK, N.J.--()--U.S. life/annuity (L/A) insurers’ holdings of high-risk assets have doubled in the past decade, growing to $287.9 billion at year-end 2015 from $143.9 billion in 2006, as companies continue to aim for higher risk-adjusted returns in the face of intense pressure from fierce competition, continued low interest rates, changing regulation and the risk of rising inflation, according to a new A.M. Best special report.

The Best’s Special Report, titled, “High Risk Asset Growth Derived Mainly From Larger Life/Annuity Organizations,” states that A.M. Best’s view of high-risk assets includes: Schedule BA assets; derivatives; NAIC-4 and NAIC-5 rated bonds; mortgages overdue 90 days, restructured, or in the process of foreclosure; real estate investment properties and those properties acquired in satisfaction of debt. According to the report, the industry’s ratio of high-risk assets to total capital increased to 67.0% from 47.3% over the past decade.

In addition, high-risk assets as a percentage of total invested assets have risen to 7.5% in 2015 from 4.9% in 2006. Conversely, the industry’s net yield has been on a generally consistent decline to 4.7% in 2015 from 5.9% in 2006. However, the decline in portfolio yields, partially due to strategic shifts in asset allocation, has begun to moderate as new money rates approach existing portfolio yields.

With the exception of 2008, the L/A industry’s total capital, including asset valuation reserve, increased each year over the last decade, growing by 41% to $429.8 billion in 2015 from $304.3 billion. L/A insurer high risk asset holdings have similarly increased over the same period; however, these have outpaced the industry’s growth in total capital.

This relationship between risk levels and capital tends to remain relatively consistent based on an organization’s size—the smaller the capital base, the less high-risk asset investment risk assumed. This is evidenced by insurers with more than $1 billion of total capital accounting for 96.5% of total high-risk assets held within the entire L/A industry. Larger insurers with total capital over $10 billion have by far the largest exposure of high-risk assets as a percent of their total capital, at 87.0%.

A.M. Best views modest allocations to high risk assets as it would many other traditional asset classes, and similar to any other asset class, there should not be significant concentrations whether by asset class or investment strategy. Most high-risk assets are being borne by higher-rated insurers that have the capital and expertise to better absorb the risk. A.M. Best remains committed to closely monitoring the rising trend in high-risk assets and regularly reviews capital charges to ensure appropriate treatment of this asset class. Furthermore, the effectiveness of hedging and proper asset/liability management of these investment holdings remains critical for overall risk management and future performance.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=256530.

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

Copyright © 2016 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Jason Hopper, +1-908-439-2200, ext. 5016
Senior Industry Research Analyst
Credit Rating Criteria –
Research and Analysis
jason.hopper@ambest.com
or
Ken Johnson, CFA, CAIA, FRM, +1-908-439-2200, ext. 5056
Senior Director
ken.johnson@ambest.com
or
Christopher Sharkey, +1-908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +1-908-439-2200, ext. 5644
Director, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best
Jason Hopper, +1-908-439-2200, ext. 5016
Senior Industry Research Analyst
Credit Rating Criteria –
Research and Analysis
jason.hopper@ambest.com
or
Ken Johnson, CFA, CAIA, FRM, +1-908-439-2200, ext. 5056
Senior Director
ken.johnson@ambest.com
or
Christopher Sharkey, +1-908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +1-908-439-2200, ext. 5644
Director, Public Relations
james.peavy@ambest.com