Aligning the Portfolio with Strategic Priorities

April 06, 2018

Keywords: Insurance Asset Management, Asset Management, Outcome Oriented Approach

The insurance industry faces considerations such as regulatory and rating agency guidelines, product and business development, surplus growth, competitive and pricing pressure, insurance evolution, and generation of net investment income. As such, the traditional methods of asset allocation that have focused primarily on total return may be incomplete or ineffective in meeting the needs of today’s insurers, and may fail to drive profitability and competitive positioning.

Some insurers lack an asset-allocation strategy that aligns their portfolio with the company’s needs and objectives. And many insurers should evaluate whether the portfolio adequately reflects the company they run. The portfolio can be strategically designed to help meet the company’s primary objectives, taking the entire organization into consideration.

Insurers’ Portfolios Differ

Investing techniques for insurers should differ from those used by other types of entities. Their investment portfolios need to support growth in book value, help meet targets for yield and net investment income, bolster capital objectives and meet liquidity needs, improve ROE and earnings, and deliver tax efficiency — all while meeting an array of regulatory requirements.

Insurers’ portfolio makeup should also differ from each other. As reported by the NAIC, variations in portfolio composition are driven by appropriately matching assets to liabilities in terms of both maturity and interest-rate risk. Risk appetite and volatility tolerance also contribute to differences in asset mixes among insurers.

Additionally, insurer size contributes to variations in portfolio composition. Smaller insurers, for example, typically hold a larger percentage of cash than larger insurers do. These factors mean there is no one-size-fits-all solution to investment portfolio composition for insurers, and they must focus on the individual needs and priorities of their company.

Assess the Company and Its Objectives

Should an insurer invest in high-yield bonds? Should it own equity — and, if so, in what types and what amounts? Should it own private credit or private equity? Should it have an oversized allocation to corporates or to municipal bonds?

The answer to these questions can be found by allowing the company’s unique profile and strategic priorities to guide the portfolio’s strategic positioning. The portfolio structure must consider the business profile as well: business type, product lines, capital profile, size, peer positioning, etc. And, is the primary priority of the company to improve earnings or net investment income? Or is it enhancing growth of surplus and reducing volatility in order to support the capacity ratio? These strategic priorities matter and the portfolio can and should be aligned to help support them.

The portfolio structure and response may be very different for a small, regional, surplus-constrained, single-line insurer than for a large, national, well-capitalized multi-line insurer.

Develop a Strategy That Meets the Company’s Objectives

After gaining a deep understanding of the company and its unique considerations and objectives, insurers should create an investment approach that aligns with these priorities and a multi-year strategy can help forecast the impact of the portfolio on the business and minimize any unintended consequences.

This process requires expertise that may not be available to all insurers. As the NAIC notes, many insurers seek out third-party vendors to identify and implement investment strategies. Many insurance asset managers can provide the infrastructure and resources to respond to shifting markets, but only a few have the expertise to develop strategies that align with company objectives.


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