While the sector performed better than banks in the downturn, insurance companies have increased their focus on risk management as well as built liquidity and capital.  Mr. Choi explained that asset allocations have shifted towards greater investment grade corporate bonds and away from structured investments for Life & Health companies while P & C companies have decreased municipal exposure while increasing exposure to high quality corporate bonds.  He expects finding acceptable investments to remain a challenge as corporate bonds are dominated by financial issuers, CMBS volumes will stay low, and there is no non-agency mortgage backed security market.

He illustrated the huge asset price recovery from year-end 2007 to today and the shift from worries about realized and unrealized losses (76% of Life & Health industry total adjusted capital at YE 2007) to a hunt for yield.  No silver bullets to offset low risk-free rates but many insurance companies are employing traditional and non-traditional strategies to remain competitive (lengthen duration, increase credit risk, more optionality, less liquid investments liquidity, forward starting swaps, non-USD bonds, negative basis trades, and secured funding to banks).

Mr. Choi believes the industry faces large regulatory changes and increased required capital levels in the near term.  Insurance accounting changes are likely coming.  This will likely include more marking to market

of assets and liabilities which should increase derivate usage. 

To contact Mr. Choi, or receive a copy of his presentation, you may reach him at:  inho.choi@barcap.com  

Written by Scott Bennett, CFA.  Scott is the 2011/12 Secretary of the CFA Society of Iowa and is a portfolio manager at Principal Global Fixed Income.