A.M. Best Special Report: Spotlight on Private Placement and 144A Holdings

OLDWICK, N.J.--(BUSINESS WIRE)-- Over the past 10 years, the property/casualty (P/C), life/annuity (L/A) and health insurance industries have all increased their private placement holdings, increasing 77.8% in aggregate from USD 516.8 billion in 2004 to USD 918.6 billion at the end of 2014, according to a new Best’s Special Report, titled, “Spotlight on Private Placement and 144A Holdings.”

As interest rates remain persistently low, private placements have been able to provide insurers with the potential for higher returns to help mitigate the run off of higher portfolio returns. Without a meaningful increase in interest rates, insurers have had limited choices for investing cash from maturing securities and new premiums to obtain targeted risk-adjusted returns. Therefore, A.M. Best believes similar to alternative assets, the current trend toward higher allocations to private placement and 144A bonds is likely to continue.

With the growth in supply of private placements, the L/A industry increased its private placement holdings 63.8% since 2004 and holds 86.7% of insurance industry holdings of private placements as of year-end 2014; similarly, the P/C industry has increased its allocation from 5.7% of the industry in 2004 to 12.5% at the end of 2014. While total dollars of private placements held by health insurers has increased from USD 1 billion in 2004 to USD 7.4 billion in 2014, the health industry’s holdings have never exceeded more than 1% of the total insurance industry. Consequently, the total dollar increase in private placement and 144A holdings by all three segments shows that while interest rates have remained low, companies have been willing to trade off liquidity for greater potential returns and somewhat more risk.

Private placement holdings are private securities held by accredited individuals or accredited institutions. Accredited individuals are those people who have a net worth of over $1 million or have had a gross income of $200,000 over the past year (married individuals are required to have a gross household income of $300,000). Accredited institutions are those institutions that have assets worth over $5 million or all of the individuals included in the institution meet the accredited individual requirements.

A.M. Best views modest allocations to private placement and 144A investments as it would any other traditional asset classes. A.M. Best analysts expect companies to be able to discuss these investments in detail, including strategic use, performance, liquidity issues and how fair value is measured. Overall, A.M. Best recognizes insurers have a good track record in private placements and generally have good internal credit shops due to their focus on investment grade corporate debt.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=238900.

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

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A.M. Best

Jason Hopper, 908-439-2200, ext. 5016

Industry Research Analyst, Credit Rating Criteria – Research & Analytics

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Ken Johnson, CFA, CAIA, FRM, 908-439-2200, ext. 5056

Assistant Vice President, Industry Research & Analysis

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Christopher Sharkey, 908-439-2200, ext. 5159

Manager, Public Relations

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Jim Peavy, 908-439-2200, ext. 5644

Assistant Vice President, Public Relations

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Source: A.M. Best Company, Inc.