A recent report by A.M. Best reveals that over a three-year period (2015-2018), the U.S. life/annuity industry grew its holdings in structured notes by one-third, with book adjusted/carrying value hitting $16 billion.
According to A.M. Best, the number of structured notes held by life/annuity insurers jumped from 817 to 1,011 during the three-year period, while the number of those that contained a mortgage reference increased from 295 to 371.
Despite this increase, A.M. Best says that the number of structured notes held by writers constitutes a relatively small slice of their general accounts.
The report highlights some concerns surrounding structured notes, including the reliance on complicated structures where the performance is based on an underlying derivative. A.M. Best notes that this element, combined with the structured notes’ fixed-income component, “means that companies have to deduce the note’s payoff structure and payoff calculation prior to purchase.”
Jason Hopper, Associate Director at A.M. Best, expanded on some of the concerns surrounding structured notes.
“Another adverse feature of structured notes is their illiquidity. Structured notes are not listed on security exchanges and can thus be very difficult to buy and sell on secondary markets. As a result, holding a structured note to maturity is compulsory, which diminishes liquidity. Insurers should be aware of this at the time of purchase,” said Hopper.
