Unaffiliated Investments

What Are Unaffiliated Investments?

Unaffiliated investments are investment holdings of an insurance company that it neither controls nor shares joint ownership with. Unaffiliated investments can include stocks, bonds, property, and other assets and are often disclosed in the financial statements of insurers.

Key Takeaways

  • Unaffiliated investments are investment holdings of an insurance company that it neither controls nor shares joint ownership with.
  • Insurers invest in securities of various liquidities in a bid to increase the return on the premiums they receive.
  • They need to have funds available quickly in order to cover liabilities, so they often make short-duration investments in highly liquid assets.
  • Regulators periodically examine these investments to determine if they are suitable and likely to pose a threat to solvency. 

Understanding Unaffiliated Investments

Insurance companies use the proceeds from their underwriting activities in a number of different ways.

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 operational expenses such as salaries, benefits, and overhead. They also allocate capital to invest in securities of various liquidities in a bid to increase the return on the premiums they receive.

Insurers need to have funds available quickly in order to cover liabilities. As a result, they often make short-duration investments in highly liquid assets that can easily and promptly be converted into cash, alongside longer-term assets that may offer a higher return. 

Depending on the type of insurance policies underwritten, an insurer’s liability 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.

Important

Asset mixes vary over time, depending on the economy and industry-specific factors, and also hinge on what the insurer specializes in: Life companies, for example, generally have longer-term liabilities, enabling them to invest more in longer-term assets.

History of Unaffiliated Investments 

Historically, insurers would generally invest in traditional asset classes that offer steady yields such as government bonds. This approach has been complicated since the financial crisis. Now that ultra-low interest rates are a regular fixture, insurers have been forced to widen their nets to secure decent returns.

In most cases, this has resulted in a shift to alternative investments, including private equity and structured finance, such as residential mortgage-backed securities (RMBS).

Because these types of non-traditional investments tend to be more complex, an increasing number of insurers have begun outsourcing investment decisions to specialist investment management firms. This has been particularly the case among smaller insurers, who generally have fewer resources available to effectively manage portfolios on their own.

51%

The hunt for yield and shift to more complex, non-traditional investments led about half of all U.S. insurers to outsource to an unaffiliated investment manager in 2019, according to the National Association of Insurance Commissioners (NAIC).

Special Considerations

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

Unaffiliated investments are included in the overall liquidity ratio, though this ratio does not take into account affiliated investments. They do not, however, appear 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.

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  1. National Association of Insurance Commissioners. "U.S. Insurance Industry Outsourcing to Unaffiliated Investment Managers at Year-End 2019," Page 1. Accessed Feb. 4, 2021.