As a result of P&C insurers’ core investment strategies continuing to minimize credit risk and the potential for balance sheet volatility, the industry continues to maintain high-quality investments with sufficient liquidity to meet and settle claims in a timely manner, according to a recent report from Fitch Ratings.
The report, “Investment Risk and Returns - Property/Casualty (Re)Insurers,” analyzes investment holdings and performance data on a GAAP basis from 2008 to 2012 for 48 holding companies with P&C insurance operations. The study compares asset allocation across companies and examines differences in investment performance and volatility over the last five years, focusing on investment yield, total investment return and the investment contribution to return on equity (ROE). For the group, investment yield has declined steadily from 4.1 percent in 2008 to 3.4 percent in 2012, and total return was -1 percent in 2008, rebounded to 8.0 percent in 2009 and ranged 4.6-5.4 percent in 2010-2012. Companies with the lowest average total return experienced more severe losses during the sharp market decline of 2008.
Several P&C insurers produced higher-than-average total return with relatively low volatility over the period, according to the report. These include Fairfax Financial Holdings, Liberty Mutual Holding, Tower Group and Meadowbrook Insurance Group.
P&C insurers maintain relatively lower investment leverage compared with life insurers and other financial institutions, which reduces the potential volatility of investment results on economic value creation, Fitch said.
Generally, investment portfolios of P&C insurers are high-quality with investment-grade bonds and short-term investments at 73 percent and 11 percent, respectively, of cash and invested assets at year-end 2012, the report states. Higher risk asset classes for the aggregate study group were equities (7 percent), below investment-grade (BIG) bonds (4 percent), mortgages and real estate (1 percent) and other (4 percent).
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