DEFINITION of 'Unaffiliated Investments'

Unaffiliated investments are stocks, bonds, and other investment holdings in companies neither owned by the insurer nor companies that share joint ownership of securities with the insurer. Unaffiliated investments are often found in the financial statements of insurance companies.

BREAKING DOWN 'Unaffiliated Investments'

Insurance companies use the proceeds from their underwriting activities for a number of different activities. They set aside funds as loss reserves to cover liabilities that they may incur from policyholders making a claim. They pay commissions to brokers who bring in new business, and pay operational expenses such as salaries, benefits, and overhead. They also use funds to invest in securities of various liquidities to try to increase the return on the premiums they receive.

Search for Yield

Insurers need to have funds available quickly in order to cover liabilities. In order to do this, they often make short-duration investments in highly liquid assets, and longer-term assets that may offer a higher return. Depending on the type of insurance policies underwritten an insurer’s liability to a policy may last a few months to a few years. Short-term assets are considered part of the insurer’s current liquidity, which is used to cover policies that have a duration of less than a year.

Unaffiliated investments are not included in the calculation of an insurer’s combined ratio. This is because the combined ratio looks at cash outflows – expense ratio, loss and loss-adjustment ratio, and dividend ratio – to see how much money it costs to maintain the book of business. Unaffiliated investments are included in the overall liquidity ratio, though this ratio does not take into account affiliated investments.

Regulators look at liquidity ratios in order to determine how quickly an insurer will be able to pay for its policyholder liabilities, and to see if the investment strategies and holdings of the insurer are likely to pose a threat to the insurer’s solvency. Insurers are required to report their financials to state insurance regulators periodically. 

These investments have gotten a lot of attention from insurers since the financial crisis because ultra-low interest rates have made it difficult to get a decent return. This has meant a shift to alternative investments including private equity and hedge funds.

"As of year-end 2015, U.S. insurers reported exposure to common stock with a book/adjusted carrying value (BACV) of $673.9 billion, of which $373.1 billion (55%) was affiliated and $269.2 billion (40%) was unaffiliated. An additional $31.5 billion in mutual funds were also reported as common stock, representing the remaining 5% of total common stock exposure," the NAIC reported. 

RELATED TERMS
  1. Current Liquidity

    Current Liquidity is the total amount of cash and unaffiliated ...
  2. Insurance Premium

    An insurance premium is the amount of money that an individual ...
  3. Policyholder Dividend Ratio

    The policyholder dividend ratio is a measurement of the profitability ...
  4. Net Liabilities To Policyholders' ...

    Net Liabilities To Policyholders' Surplus is the ratio of an ...
  5. Conditional Reserves

    Surplus reserves held by insurance companies that are treated ...
  6. Insurance Industry ETF

    A sector-following fund that invests primarily in insurance companies, ...
Related Articles
  1. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  2. Insurance

    Understanding your insurance contract

    Learn how to read one of the most important documents you own: your insurance contract.
  3. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  4. Insurance

    How to Protect Your Income No Matter What

    What does it mean to insure your income? Here are a variety of ways to do it and some insights into when it might make sense to invest in income insurance.
  5. Financial Advisor

    Mutual Vs. Publically Traded Insurance Companies

    Should you buy your insurance policy from a mutual or publically traded insurance company?
  6. Insurance

    For Life Insurers, Making Money Is A Numbers Game

    Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
  7. Insurance

    An Advisor's Guide to Prof. Liability Insurance

    A guide to what financial advisors need to know about professional liability insurance.
RELATED FAQS
  1. What is the expense ratio in the insurance industry?

    Understand the two different methods of calculating expense ratio and find out how it can be used to compare insurance companies ... Read Answer >>
  2. How can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center