Insurer investment strategies rapidly changing course

Insurer investment strategies rapidly changing course

The insistence by the US Federal Reserve last year to persist with a low interest policy has clearly hit home with the managers of insurance company assets, and more and more insurer portfolios have been actively re-positioning with non-traditional alternatives. Coinciding with this changing trend is the growing impact of new technologies on the investment process. 

The year of 2016 will certainly be remembered for shaking up the entire investment world, not only insurance investment. But insurers, and their external advisors - notably and understandably one of the more conservative institutional asset management sectors - have come into prominence lately with much less risk averse attitudes than in the past. 

Highlighting this broader perspective on how and where to manage insurance assets are 10 investment ideas for insurers in 2017 offered by the Mercer division of Marsh & McLennan Companies in a paper titled “Investing in a New World”. These ideas are “pivotal to the successful management of an insurer’s assets through this period of uncertainty”, Mercer claims.

In brief, the Mercer ideas - split between governance, financial and operational – are as follows: Optimise the Investment Operating Model; Protect the Downside; Capture Emerging Risks and Opportunities; Investigate Alternative Return Generators; Investigate Real Assets; Understand and Utilise Liquidity; Integrate Environmental, Social and Governance (ESG); Adopt Smarter Implementation; Consider Alternative Risk Quantification Measures; and Align Management Information with Need for Dynamism.

“These are good ideas,” says David Holmes, founder of the Insurance Asset Outsourcing Exchange. “Insurance companies are already acting on some of these ideas. We’ve seen an uptick in the alternatives mandates insurance companies are outsourcing to third party investment managers. And there is heightened discussion around risk management approaches and new investment solutions.”

Certainly a useful Top 10. In fact, an examination of insurer investment performances in 2016 gives a very clear indication that a good number of leading insurance companies are now considerably more active than passive with their investment strategies.

Here’s a cross-section of commentaries by 10 insurers accompanying the recent announcements of 2016 results that demonstrate the extent of this trend:

Investment strategies in action

Hanover Insurance Group, Inc.

Net investment income was $74.2m for the fourth quarter of 2016, compared with $70m in the prior-year period.  For the full year, net investment income was $279.4m, compared with $279.1m in 2015.  The increase in both periods was primarily due to the investment of higher net cash flows and additional income from other asset classes, such as commercial mortgage loan participations, partnerships and equities.

Hartford Financial Services Group, Inc.

Fourth quarter 2016 net investment income totalled $758m, before tax, a 9% increase from fourth quarter 2015 principally due to higher investment income from LPs (Limited Partnerships). Investment income from LPs totalled $73m, before tax, in fourth quarter 2016 compared with $12m, before tax, in fourth quarter 2015. The increase was largely due to real estate sales and strong private equity returns. Excluding the impact of LPs, net investment income was essentially flat compared with fourth quarter 2015.

Horace Mann Educators Corp.

Total net investment income increased 7% and 9% compared to the three and 12 months ended December 31, 2015, respectively. While asset balances in the retirement segment continued to grow, overall investment results reflected the increase in investment prepayment activity and favourable returns on alternative investments, partially offset by the impact of the current low interest rate environment.

James River Group Holdings, Ltd

Net investment income for the fourth quarter of 2016 was $14m which compares with $10.3m for the same period in 2015. The increase was principally driven by fair value gains in the company’s renewable energy portfolio, an increase in the value of certain limited partnership investments and asset growth across the core investment portfolio.

Navigators Group, Inc.

Net investment income for the three and twelve months ended December 31, 2016 was $20.1m and $79.5m, respectively, increases of 8.7% and 15.6% as compared with the same periods in 2015. The company’s investment portfolio mainly consists of fixed income securities with an average quality rating of “AA-/Aa3” as defined by S&P and Moody’s, respectively, with an average effective duration of 3.7 years as of December 31, 2016.

Old Republic International Corp.

Fourth quarter net investment income $100.0m versus $99.7m, full year 2016 $387.0m versus $388.6m. As of December 31, 2016, the consolidated investment portfolio reflected an allocation of approximately 77% to fixed-maturity and short-term investments, and 23% to equities. Investments in high quality, dividend-paying equity securities have been singularly emphasised since 2013, and the asset quality of the fixed maturity portfolio has remained at high levels.

RLI Corp.

RLI’s net investment income for the quarter fell 4.4% to $13.2m, compared with the same period in 2015. For the year ended December 31, 2016, investment income was $53.1m versus $54.6m for the same period in 2015. The investment portfolio’s total return was -1.2% for the quarter. The bond portfolio’s return was -2.3% in the quarter, while the equity portfolio’s return was 3.9%. For the year ended December 31, 2016, the investment portfolio’s total return was 5.7% with the bond portfolio returning 3.2% and equities returning 16.3%.

Selective Insurance Group, Inc.

After-tax investment income in the fourth quarter was $26m, up 13% compared to a year ago. For full year 2016, after-tax investment income was $98m, up 5% from the prior year. The improvements in both periods were driven by returns on our alternative investment portfolio, coupled with a higher invested asset base from cash flow from operations, and a slightly increased allocation to high yield fixed income securities.  

Travelers Companies, Inc.

Full year 2016 net investment income of $2.302bn pre-tax ($1.846bn after-tax) decreased due to lower returns in the fixed income portfolio, partially offset by higher returns in the non-fixed income portfolio. Fixed income returns declined in line with expectations due to lower reinvestment rates available in the market. Non-fixed income returns increased due to higher private equity returns, partially offset by lower real estate partnership returns.

Validus Holdings, Ltd.

Net investment income from managed investments for the three months ended December 31, 2016 was $35.9m compared with $29.9m for the three months ended December 31, 2015, an increase of $6m, or 20%. The increase was primarily driven by returns on the company’s portfolio of structured securities, of which $4m was generated from a single fixed income fund.

Not all 10 companies look fully committed to wider investment horizons, but there is certainly strong evidence of diversity into non-traditional assets by most of them. As Mercer notes, not all its ideas will be appropriate for every insurer in the “New World” of investment. But there is surely another set of ideas coming soon that no insurer can afford to ignore – ideas that are going to arise from the latest advances in technology.

More New Worlds in store

One critically-important development is going to be linking artificial intelligence (AI) and machine learning (ML), according to Alton Cogert, president and CEO of Strategic Asset Alliance, a US-based investment consulting firm that works exclusively with insurance organisations.

 AI is intelligence exhibited by a machine that maximises its chance of success aiming for a desired goal. How can a machine obtain such intelligence? One way is through ML, a type of artificial intelligence that provides computers with the ability to learn without being explicitly programmed. 

States Cogert in a recent blog: “Investment portfolio managers, strategists, even chief investment officers and many others, will be severely impacted when AI gets behind our financial markets over the next five to 10 years.”

Let ML use Big Data from the markets and many other sources, and see how AI develops, he says, and asks: “Will it successfully and consistently predict market moves, making human traders’ activities sub-optimal? What value would be added by portfolio managers and investment strategists, if the AI can do a better job? Or are markets too subject to human emotions.”

Nobody knows all the answers yet, but it certainly looks like insurance asset management and the investment world at large will be facing the impact of more “New Worlds” for a quite some time to come. 

About the author

Alex McCallum is the editor of InsurerAM News (, a US-based online service that covers insurance investment-related developments for professionals active in the management of insurance company assets. He is a former Reuters US financial editor.

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