OLDWICK, N.J.--(BUSINESS WIRE)--
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
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
A.M. Best Co.
Industry Research Analyst,
Research and Analytics
(908) 439-2200, ext.
Ken Johnson, CFA
Assistant Vice President,
(908) 439-2200, ext. 5056
Manager, Public Relations
+(1) 908 439 2200, ext. 5159
Assistant Vice President, Public Relations
439-2200, ext. 5644
Source: A.M. Best Co.