Unaffiliated Investments

Unaffiliated investments are assets held by an insurance company that it neither controls nor owns jointly with another party. These holdings—such as stocks, bonds, real estate, and other securities—appear in insurers’ financial statements and are managed to balance liquidity needs, return objectives, and regulatory constraints.

Key takeaways

• Unaffiliated investments are third-party assets held by an insurer, not under the insurer’s control.
• Insurers balance short-duration liquid holdings for immediate claim payments with longer-term assets for higher returns.
• Low interest rates and the search for yield have pushed many insurers toward alternative, more complex investments.
• Regulators monitor investment mixes and liquidity ratios to assess solvency risk.

How insurers use unaffiliated investments

Insurance companies deploy premiums and other proceeds in several ways:
* Establish loss reserves to cover future policy claims.
Pay commissions and cover operating expenses.
Invest remaining capital to earn returns that support profitability and long-term obligations.

Because insurers must be able to pay claims quickly, a portion of their portfolio is held in short-duration, highly liquid assets. These support liabilities that mature within a year and form part of the insurer’s current liquidity. Other capital is invested in longer-duration assets when liabilities permit—life insurers, for example, typically have longer-term obligations and therefore allocate more to longer-duration investments.

Historical trends and recent shifts

Traditionally, insurers favored stable, yield-producing assets like government and high-quality corporate bonds. Since the financial crisis and the persistence of ultra-low interest rates, many insurers have broadened their investment strategies to include alternatives such as private equity and structured finance (including residential mortgage‑backed securities). These instruments can offer higher yields but are often more complex and less liquid.

The complexity and resource demands of these investments have driven many insurers—particularly smaller firms—to outsource portfolio management to specialist, unaffiliated investment managers. By the end of 2019, roughly half of U.S. insurers had outsourced investment management to unaffiliated firms.

Regulatory and solvency considerations

State insurance regulators require periodic financial reporting and review insurers’ liquidity and capital adequacy. Key points:
* Regulators evaluate liquidity ratios to determine whether an insurer can meet near-term policyholder obligations. Unaffiliated investments are included in these liquidity assessments.
Investment strategies and holdings are reviewed for suitability and potential threats to solvency.
Unaffiliated investments are not part of the insurance combined ratio, which focuses on underwriting-related cash outflows (losses, loss adjustment expenses, and operating costs).

Practical implications

• For insurers: a prudent mix of unaffiliated investments helps manage the trade-off between liquidity and return, while governance and oversight are critical when investing in complex assets or outsourcing management.
• For policyholders and stakeholders: diversified, appropriately liquid investment portfolios reduce the risk that an insurer will be unable to honor claims.

Conclusion

Unaffiliated investments play a central role in how insurers manage capital, meet obligations, and pursue yield. The mix of short- and long-term holdings depends on an insurer’s liability profile, market conditions, and risk tolerance. Regulatory oversight focuses on ensuring these investments support solvency and do not introduce undue systemic risk.