While the majority of P&C CFOs acknowledge principal preservation and total return as the most important objectives of their companies’ portfolio management, only one of those objectives is delivering satisfaction, according to a new survey from Towers Watson, titled “Property & Casualty Insurance CFO Survey.”
Three-quarters of respondents said principal preservation is the most important objective for their companies, and equal percentages reported being very satisfied with the outcome. Total return was ranked most important by 69 percent of the CFOs; however, only 23 percent are very satisfied with it.
“The responses from our survey illustrate that capital appreciation and investment income aren’t sufficiently contributing to P&C insurance company returns levels needed to adequately please their investors,” said Stuart Hayes, senior consultant, Towers Watson.
According to the survey, 31 percent of respondents expect their companies’ investment strategies to become slightly more aggressive in the coming year, yet none say they anticipate taking on a significantly more aggressive investment posture. Hayes added, “The more assertive investment posture reflects a low interest rate environment that necessitates slightly more risk taking to improve portfolio returns.”
Over the next three years, all respondents expect low interest rates to be their companies’ biggest challenge. Paradoxically, half of the CFOs expect the risk of rapidly rising rates to also be their biggest challenge. Market volatility was also noted as a top concern. “This reflects the continuing financial crisis, which promises to remain a part of the investment landscape due to financial weakness in the European Union and the possibility that the global economy could face a new recession,” said Hayes.
Despite the fact that 75 percent said they were very satisfied with their company’s asset/liability management, in terms of matching liabilities and assets, 19 percent disclosed that their portfolios are shorter on assets by more than two years. Another 19 percent indicated the opposite, that their company is shorter on liabilities by more than two years.
CFOs also described how their companies’ investment risk profile compares to its stated investment risk tolerance limit. While no respondents are over their limit, 53 percent expressed that their companies are at, or near, their risk tolerance limit, and only 47 percent are significantly under their stated risk tolerance.
When respondents were questioned as to what degree their investment management was outsourced for each of its general account invested assets, CFOs revealed it largely depended on the difficulty of managing particular asset classes. For example, five out of six respondents that listed hedge fund assets as an investment also outsourced that part of their portfolios. However, for core fixed-income investments, only 63 percent of CFOs said their companies completely outsourced the responsibility for managing that sector of their portfolios.
CFOs from 32 different P&C companies participated in the survey, and according to Towers Watson, respondents represent a cross section of companies of all sizes and a variety of distribution systems.
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