By design, risk pooling portfolios are never fully diversified.
Most risk allocate their portfolios heavily towards investment-grade fixed income to account for policy holder obligations, reserves and sufficient risk capital.
With interest rates at or near all-time lows, investing in “Risk Assets” can be a viable option for risk pools looking for ways to increase yields to support the underlying business.
View Complete Primer/PDF (Risk Asset Allocation Pool Peer Comparison on Page 3)
What Are “Risk Assets?”
Risk assets are any investment outside of investment-grade fixed income.
These assets provide greater potential yields, but with greater risk of loss and/or return volatility. Risk assets may also potentially help risk pools maximize portfolio diversification.
What “Risk Assets” are Risk Pools Utilizing?
High-Yield bonds are below investment-grade and carry a higher risk of default; however, these bonds pay a higher yield than investment-grade bonds.
Below Investment-Grade Ratings:
S&P: Below “BBB”
Moody’s: Below “Baa”
NAIC: Bonds Rated 3 to 6
Common Stock (or Equities):
Common stocks are securities that represent ownership in a corporation, with the value of the stock being tied to corporate growth/stock market. Common stocks typically offer greater returns than bonds, but carry higher risk of loss, as well as increased return volatility.
Similar to common stock, however the value of a preferred stock is tied to interest rates and not the state of the stock market. Unlike common stock, preferred shareholders have no voice in the future of the company.
Certain Long-Term Schedule Ba Investments*:
Schedule Ba investments constitute several “other” investments types, but includes risk assets utilized by insurers and risk pools. These assets are more yield-oriented, but come with greater risk of loss, volatility & liquidity risk.
Schedule Ba Risk Assets:
Developed and Emerging Markets
Many Schedule Ba investments are categorized as “alternative investments,” such as hedge funds and private equity. SAA is, for the most part, not a proponent of alternatives such as hedge funds and private equity for insurers and risk pools due to their high level of fees, potential lack of liquidity/ transparency, impact to capital ratios, and agency problems.