insurance company investment trends – a client survey 2015/roundtable/aam 20… · insurance...

Insurance Company Investment Trends – A Client

SurveyMarco Bravo, CFA

Principal, Senior Portfolio ManagerAAM - Insurance Investment Management

The 2015 Executive Education Roundtable Series

#IASAEEPThe 2015 Executive Education Roundtable Series

Summary of Survey Respondents

Life21%

P&C73%

Health2%

Multi-Line2%

Other2%

48 Total Respondents

Company Type Portfolio Size

0% 10% 20% 30% 40% 50% 60%

Less than $100M

$100M - $500M

$500M - $1B

$1B - $5B

2


Who is responsible for management of the investment portfolio?

60%

13%

27%

External Asset Manager

Managed Internally

Combination Internal & External

3


Companies considering outsourcing investment management?

6%

29%

65%

Yes

No

N/A - Already Outsourced

4


What’s Important When Considering Outsourcing Investment Management?

68%

20%

7%

5%

Expertise / Ideas

Limited Time / Resources

Risk Management Tools

Cost Efficiency

5


Investment management services should go beyond just portfolio management• Asset Allocation / Risk Asset Analysis

• Dynamic Financial Analysis

• Investment Policy Construction / Review

• Investment Income Projections

• Tax Modeling

• ALM / Duration Targeting

• Cash Flow Testing

• Performance Benchmarking & Attribution

• Liquidity Analysis

• Peer Analysis

• Rating Agency Support

• RBC / BCAR Sensitivity Analysis

• Investment Accounting

• Accounting Support

• Portfolio Acquisition Due Diligence6


Which investment objective is most important?

23%

6%

71%

0%

10%

20%

70%

0%

Maximize Total Return

Maximize Income

Preservation of Capital

Provide Liquidity

P&C Life

7


Ranking of Investment Objectives

0% 20% 40% 60% 80% 100%

Most Important

Least Important

Maximize Total Return Maximize Income

Provide Liquidity Preservation of Capital

8


Which investment risk is most important?

68%

24%

9%

80%

20%

0%

Credit

Duration

Other

P&C Life

9


Ranking of Portfolio Risks

0% 50% 100%

Most Important

Least Important

Credit RiskDurationYield CurveCall RiskLiquidityMark to MarketForeign Exchange

10


Industry credit trends – exposure to below investment grade bonds.

0%

1%

2%

3%

4%

5%

6%

7%

2010 2011 2012 2013 2014

% of Total Bonds % of Surplus

P&C Industry

0%

10%

20%

30%

40%

50%

60%

2010 2011 2012 2013 2014

% of Total Bonds % of Surplus

Life Industry

Source: SNL 11


Credit risk considerations.

0

10

20

30

40

50

60

AA A BBB BB B

Cum

ulat

ive

Defa

ult R

ate

(%)

Cumulative Default Rates (1983-2014)

5yr10yr15yr

Source: Moody’s Annual Default Study (Mar 2015)

Default rates do not increase linearly as rating is decreased.

Set portfolio concentration limits that take into account default and recovery rates.

Consider surplus exposure if Assets to Surplus leverage is high.

12


Industry duration trends – exposure to 10+ year bond maturity.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014

10yr - 20yr > 20yr

P&C Industry

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014

10yr -20yr >20yr

Life Industry

Source: SNL 13


Duration risk considerations.• Surplus volatility

• ALM considerations

• Income needs

Formula: DS = (DA-DL) x (A/S) + DL

D = DurationA = Assets

• Liquidity needs

• Asset Leverage

L = LiabilitiesS = Surplus

To immunize surplus from interest rate risk, set DS = 0Then Asset Duration = DL x (L/A)

To set specific level of surplus interest risk, DA = (DS-DL) x (S/A) + DL

14


37%

30%

20%

11%

2%

Monetary Policy

Inflation

Slowing Global Growth

Deflation

Oil Prices

Which macro-economic risk are you most concerned with?

15


58%

23%

13%

4%

2%

Low Yields

Rising Rates

Equity Volatility

Increase in Credit Defaults

Credit Spread Widening

Which investment risk are you most concerned with?

16


Worrisome trend in corporate market as credit metrics are weakening.

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

12/1

/200

47/

1/20

052/

1/20

069/

1/20

064/

1/20

0711

/1/2

007

6/1/

2008

1/1/

2009

8/1/

2009

3/1/

2010

10/1

/201

05/

1/20

1112

/1/2

011

7/1/

2012

2/1/

2013

9/1/

2013

4/1/

2014

11/1

/201

4

Use of Cash from Operations for A/better

Capital Expenditures M&A Dividends Net Share repurchases

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

12/1

/200

4

7/1/

2005

2/1/

2006

9/1/

2006

4/1/

2007

11/1

/200

7

6/1/

2008

1/1/

2009

8/1/

2009

3/1/

2010

10/1

/201

0

5/1/

2011

12/1

/201

1

7/1/

2012

2/1/

2013

9/1/

2013

4/1/

2014

11/1

/201

4

Use of Cash from Operations for BBBs

Capital Expenditures M&A Dividends Net Share repurchases

Source: AAM, Capital IQ (Universe includes 451Industrial companies; Financial data as of 3/31/2015 17


Worrisome trend in corporate market as credit metrics are weakening.

Source: AAM, Capital IQ (Universe includes 451Industrial companies; Financial data as of 3/31/2015 18


Corporate sector expectations.

PROS:

• Consumer is in a better position to spend• Job market is improving• Global demand for yield with limited alternatives

CONS:

• Liquidity is challenging in fixed income• Fed action should slow (already nonexistent) credit growth• Event risk remains high with debt funded deals increasing • Late stage of the credit cycle; Companies acting more aggressively

In this stage of the cycle, focus on liquidity and quality

Source: JPM “Where We Are In The Credit Cycle” 10/14/2014

AAM’s view of US HG

19


How do current investment opportunities compare to a year ago?

64%

13%

23%

The Same

Better

Worse

20


Which risks are you currently willing to increase to achieve a higher yield/return?

42%

27%

13%

9%

9%

None

Credit

Duration

Liquidity

Market

21


Risk premiums appear fair.

0

200

400

600

800

1000

1200OAS (bps)

BBB Industrial - A Industrial High Yield (ex Energy) - BBB Industrial

Source: Barclays22


Which non core fixed income asset class have you been adding (or considering adding)?

0%

5%

10%

15%

20%

25%

30%

35%

40%

Equity CommercialLoans

High Yield Convertibles MLPs EM Debt EM Equity Other

23


Equity valuations appear fully valued.

10

11

12

13

14

15

16

17

18

19

20

1.8

2.0

2.2

2.4

2.6

2.8

3.0

5/20/2011 5/20/2012 5/20/2013 5/20/2014

Ratio

Ratio

S&P500 Price to Book (LHS) S&P500 Price to Earnings (RHS)S&P500 Price to Earnings Estimates (RHS)

Source: Bloomberg24


Consider Convertibles as an alternative to equities.

61

106

55

88

4939

71

95

59

38 3723 21

44 44

0

20

40

60

80

100

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

YTD

U.S.

New

Issu

e Su

pply

($Bl

n)

AnnualizedNew Issue

Why consider convertibles?

• Equity market exposure

• Downside protection

• Low correlation to traditional fixed income

• Low interest rate sensitivity

• Historically good performance in rising rate environments

• Favorable regulatory and accounting treatment

Convertible issuance has picked up

Source: Zazove Associates, LLC,BAML Global Convertibles Research

25


Industry trends regarding alternative assets.

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Common Stocks Other InvestmentsHigh Yield Bonds Preferred StocksReal Estate Mortgage Loans

Alternative Assets as % of Surplus

• Understand the risks

• Model the tail risks

• Liquidity could be challenging in a higher volatility environment

Source: SNL 26


Questions ?

27

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