A significant component of managing a property/casualty insurance company’s investment portfolio is gap management—ensuring that asset cash flows and returns always exceed claims and expenses by a healthy amount. Because risk-based capital levels, as well as loss and combined ratios, inform various aspects of an insurer’s existence on everything from basic solvency to growth capacity to credit rating, protecting and growing this margin is an imperative. Yet as nearly every insurer is aware today, maintaining portfolio income levels and minding that gap is an adventure fraught with peril.

Executive Summary

In the midst of a yield drought, it is easy for P/C insurance carrier investment managers to get out over their skis—moving into areas of the market with which they are not familiar. Sage Advisory's Josh Magden sets forth reminders about concentration risk management, appropriate duration strategies and suggests possible modes of investment, such as ETFs, to boost yields while maintaining liquidity.

Perpetually low interest rates and anemic economic growth in the United States afflict the asset side of the ledger.

For P/C insurers, while catastrophe-related losses in 2012 were lower than in 2011 (notwithstanding some estimates that Hurricane Sandy could cost upwards of $20 billion in the final tally), the liability side of the ledger also remains challenged, with a middling ability to raise premiums in many market segments due in part to slow economic growth.

For life insurers, product guarantees combined with ongoing low interest rates on long-dated investment options make for an uncomfortable forecast, though life insurers typically have more time to work through the low rate dilemma than do P/C insurers.

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