Asset Management for Insurers — Why Industry Expertise Matters
September 12, 2018
Insurance asset management is a specialized investment market, and insurers invest in a different way than a high-net-worth individual or another institution. To help maximize the contribution of their investments to their business results, insurers often require an asset manager with a more intimate knowledge of the particular needs of the sector.
As a specialized insurance asset manager, we believe insurers that use a broker or a wealth manager to invest their asset portfolios are likely not getting all that they should from their asset management.
Despite the risks, we commonly observe insurers using longtime wealth advisors or local broker-dealers — and we see problems arise from these arrangements time and again. Here are four key areas where having an asset manager that is well-versed in the industry could make a big difference.
Customize the Portfolio to Your Liability Structure
A one-size-fits-all approach does not work in the insurance industry because companies vary so widely in how they’re structured and how they handle risk. Within the property and casualty sector alone, coverage types range from individual home to commercial auto to medical or construction liability. The tail length, amounts, and structures of these risks vary widely, as do the company liquidity, loss experience, surplus levels, and attachment points for reinsurance.
A wealth advisor focused on investing a high-net-worth individual’s portfolio to meet retirement goals, or a broker-dealer focused on selling bonds are performing vastly different services than needed when investing an insurance firm’s assets that must be available to pay out liabilities for years to come.
Efficiently Allocate Assets Across the Capitalization Structure
Rating agencies and the NAIC assign capital charges to different types of assets held by insurance companies, as well as risks within the business. An insurer must hold a certain amount of reserves relative to the risk the company is taking on.
Insurers must be assured their portfolios are effectively allocated across asset classes, sectors, maturity ranges, and credit qualities to get the best yield or return per unit of capital. This allocation will oftentimes look significantly different for different types of insurers with different levels of surplus. A wealth advisor or broker-dealer may not be able to help an insurer understand their cost of capital and manage the portfolio to be as effective as possible. Insurers do not want to leave potential yield on the table or, alternatively, pay for risks that don’t pay off for the company.
Manage Gain and Loss Effectively to Coordinate with Business Activity
Many insurers tend to look at their investment portfolio as completely separate from their business, but these elements are quite connected. Portfolio management and structure should support the business goals of the insurer. As an example, for an insurer experiencing major claims losses in a particular year, the asset manager could structure trading activity to help partially offset those losses. Similarly, a portfolio could harvest losses to help offset gains in a highly profitable year. No matter the annual impact, insurers need assurances that the portfolio will help them strategically weather various market cycles, no matter the loss experience.
It is important to have ongoing conversation with the asset manager to ensure they’re appropriately managing the portfolio to coordinate with the business.
Receive the Proper Support Services
Insurers require a host of insurance-specific support services, including rating agency support, OTTI reporting, state code compliance and more. Wealth advisors and brokers will likely not have the infrastructure or systems to provide the full range of services.
Compliance is an issue of great importance that’s often overlooked by advisors. Insurers are regulated at the state level, and it’s critical that the asset manager understand and codify all state code and company-specific compliance considerations to minimize any potential violations. Companies that are not maintaining compliance rules for these regulations and testing the portfolio daily could be heading into trouble. A knowledgeable asset manager can help offset compliance issues before they arise.
At Miles Capital, we bring a wealth of insurance industry knowledge. We have managed insurance portfolios for over 30 years and we have specifically constructed our team with the purpose of understanding and helping meet our clients’ needs. Nearly all of our investment professionals, and many of our other team members, have backgrounds deeply rooted in the insurance industry. We customize our clients’ portfolios to meet liability and other structural considerations, consider efficient use of capital, help manage tax liabilities, and provide a suite of insurance-specific services.
This material is for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expresses may change as subsequent conditions vary. The information herein is based on sources which Miles Capital believes to be reliable, but is not guaranteed to be accurate or complete.
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