Market Overview

Best's Special Report: U.S. Health Insurance Companies Expanding Investment Options


The U.S. health insurance industry's invested assets have grown at a
sizable pace over the last decade, averaging nearly 8% annually, with
some shifts into non-traditional asset classes, according to a new A.M.

The Best's Special Report, titled, "Health Insurance Companies
Expanding Investment Options," notes that the challenging low interest
rate environment has compelled health carriers to consider
non-traditional asset classes as a means to incrementally bolster
overall investment returns Invested assets in aggregate for the health
industry increased to $296.2 billion in 2017 from $151.2 billion in
2008. The top five organizations account for 44% of the segment's
invested assets, while the top 10 account for 56%, which is largely made
up of publicly traded companies and Blue Cross/Blue Shield branded
organizations. While investment income has fluctuated over the last 10
years, its contribution to net operating gains has been fairly
range-bound, hovering around one-quarter. Health carriers have been
tweaking their bond portfolios in ways not done before as a means of
increasing yield.

The share of bond portfolio allocations to NAIC-2 rated bonds has more
than doubled since 2008, to 15.7% at year-end 2017. While the companies
with the largest bond portfolios have seen the most dramatic movement,
this transition has been across the segment. More than 60% of all
companies within the segment have increased their NAIC-2 bond
allocations since 2013, at least partially driven by an increase in bank
security holdings. Health carriers also have increasingly been looking
to invest new money in private placement bonds. The industry has nearly
doubled its allocation private placement bonds since 2013, with a 10.1%
increase in investments in 2017. Schedule BA assets, which are viewed as
high risk, nearly doubled to 5.1% of overall allocations in 2017 from
2.7% in 2009.

Overall, A.M. Best has a negative view on the rising share of higher
risk assets for health insurance companies. Growing exposure to multiple
riskier asset classes—joint ventures, lower-rated fixed income, private
placements—create increased potential for losses and pressure on the
capital. For the majority of carriers, this concern is mitigated through
more than sufficient levels of risk-adjusted capitalization and
liquidity. In addition, A.M. Best notes that compared with past periods,
many carriers have become more sophisticated in the area of investment
allocation and overall balance sheet risk management. However, the last
several years have showed that health insurance carriers should be ready
to face a higher degree of uncertainty and the potential for
legislative/regulatory events with short notice and a possible negative
impact on financial results. A.M. Best will continue to monitor asset
allocations of health insurance companies and evaluate the impact on
their balance sheets in the context of overall risk management.

To access the full copy of this special report, please visit

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