Additional Resources

ACTIONABLE INTELLIGENCE FOR YOUR INSURER’S PORTFOLIO

DISCOVER VALUE BEYOND THE TYPICAL INVESTMENT REPORTING PACKAGE

InsurerCIO provides an easy-to-use platform for insurers to develop in-depth reports and analysis of their portfolio. By providing actionable intelligence with our investment reporting analyses, insurers are provided an opportunity to better understand their investments, without the requirement of a full advisory relationship with their consultant. With InsurerCIO’s new analytic features, insurers can discover new ways to look at their portfolio, while also finding new questions to ask that will lead to better financial results.

FEATURES & BENEFITS

Analyze – How should you be reviewing your portfolio?
• Discover - Important questions for your investment manager
• Perform – How is your portfolio really performing?
• Compare – How does your portfolio compare to similar insurers?

As provided by public filings, InsurerCIO provides a comparison to insurers that are closest to yours based upon a formula that considers factors, such as lines of business and portfolio size. This can be used as a starting point to discover how your investment strategy differs from your peer’s and why. Click here to learn more.

MAINTAIN PROPER CORPORATE GOVERNANCE

A key issue of good corporate governance is the monitoring of investment manager performance by an independent third party. Many investment managers have high investment flexibility that provides an opportunity for improved investment income and return, but also increased risk. Partner Clients of InsurerCIO receive a Quarterly Investment Review and can speak with an SAA Principal at any time about any issue covered in the Review. Importantly, the Quarterly Review would also include a peer review analysis comparing your insurer’s risk profile to similar insurers. Contact us to learn more about the key investment monitoring and governance benefits for InsurerCIO Partner Clients.

As part of every reporting package, a quarterly marketing summary will be provided. These quarterly market summaries provide commentary on both the U.S and Global financial markets. There are also several charts that provide breakdowns for index returns in the capital markets and fixed income sectors. You can also view a snapshot of the fixed income and equity market focus for the previous quarter.

InsurerCIO’s Quarterly Investment Review provides each client with an in-depth, quarterly review of their portfolio, providing a summary of the markets and performance of the insurer’s investments. With this review, insurers are provided with a brief, yet detailed snapshot of their portfolio’s performance. They are also able to see what activities in the financial landscape have affected their investments and what to closely pay attention to in future quarters.

FOR MORE INFORMATION & TO SEE SAMPLE CHARTS, CLICK THE TABS ABOVE OR CONTACT US AT EEUGENIO@SAAI.COM

Analyze – How should you be reviewing your portfolio?

Fixed income portfolio credit rating allocation by sector, quarterly over the last six years. This can also be viewed in a summarized version.

Insurers tend to make changes to their portfolio slowly from quarter to quarter, keeping in mind realized gain or loss limits, etc. However this report allows you to see trends over a longer term horizon, since small changes over a long period of time can equate to very large changes. Thus, this report allows you to see trends in credit rating exposure over the last six years.

Fixed income portfolio asset allocation by sector over the last six years. This chart can be viewed in either a detailed or summarized version.

Insurers tend to make changes to their portfolio slowly from quarter to quarter, keeping in mind realized gain or loss limits, etc. However this report allows you to see trends over a longer term horizon, since small changes over a long period of time can equate to very large changes. Thus, this report allows you to see trends in the mix of fixed income sectors over the last six years.

Did you know that the credit rating agencies provide the same rating for a given issuer, irrespective of the maturity of its bond?  In other words, an issuers two year bond is given the same credit rating as its ten year bond, despite the fact that projecting corporate ability to pay increases in uncertainty over longer time horizons.  With that in mind, this graph combines credit and interest rate risk.  Each vertical bar shows the percentage of the fixed income portfolio invested in a given credit rating.  The horizontal line shows the average portfolio duration, while the other lines connect the points corresponding to the duration (interest rate risk) within a given credit rating.

Combining credit and interest rate risk simultaneously can be problematical.  Ideally, the duration for any given credit rating will not vary much from the portfolio’s overall duration.  However, if duration increases as credit risk increases (an upward sloping line) the portfolio is indeed combining credit and interest rate risk simultaneously.

Did you know that virtually all investment reporting systems assume that the probability of default for a bond changes linearly as credit rating worsens?  In other words, those other reporting systems assume, for example, that a bond moving from A to A- has increased its default probability as much as a bond moving from BBB- to BB+.  This is patently false and tends to provide companies with an inaccurate picture of portfolio credit risk.  Instead, using long term Moody’s default factors we find that the default probability increases in much greater than a linear way.  By re-weighting each bond’s probability of default using those factors and then determining the average credit quality, we get a better idea of the portfolio’s “true” average credit rating.  This table compares that “true” average credit rating (Moody column) to the linear calculation assuming it uses the +/- in credit ratings (Detailed) or does not use the +/- (Summarized).  It also compares to a re-weighted average credit rating using risk based capital weights (RBC).

Most every investment policy attempts to control credit risk by including a ‘minimum’ average credit rating for the bond portfolio.  However, we believe it is important to correctly calculate such ‘minimum’ average credit rating and/or at least be aware of the difficulties in accepting the linear approach found in nearly all investment reporting systems.  To add perspective, the ‘factor average’ found in the Moody column provides the weighted expected long term default rate of the portfolio.

Portfolio book yield over time.

In a low rate environment, where market yields on new purchases are below portfolio book yield, an ongoing decline in book yield is expected.  But, how far has it changed over time?

Fixed income portfolio asset allocation over the last five quarters.

Behind every fixed income portfolio is an allocation amongst similar, yet different, asset classes.  Insurers tend to have portfolios tilted more towards ‘spread’ sectors and away from lower yielding US Treasuries and Agencies.  This report allows you to see trends in the mix of sectors over the last five quarters.

Change in fixed income portfolio asset allocation from the prior quarter.

Major changes in fixed income portfolio asset allocation are spotted quickly by reviewing this graph.

Percentage of the fixed income portfolio invested in any given detailed credit rating over the last five quarters.

One of the most important decisions in fixed income portfolio construction is its exposure to credit risk.  This report allows you to see trends in this allocation over the last five quarters.

Percentage of the fixed income portfolio invested in any given summarized credit rating over the last five quarters.

One of the most important decisions in fixed income portfolio construction is its exposure to credit risk.  This report allows you to see trends in this allocation over the last five quarters.

The Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC) requires that US insurer fixed income investments have an SVO credit rating, ranging from 1 to 6.  The SVO has issued a table which shows the equivalent SVO rating for any given ratings from S&P, Moody’s or Fitch.  This report uses that table to imply the correct SVO rating for each security in the fixed income portfolio; and then show the percentage of the fixed income portfolio invested in any given SVO rating over the last five quarters.

One of the most important decisions in fixed income portfolio construction is its exposure to credit risk.  This report allows you to see trends in this allocation over the last five quarters, as would be seen through the ‘eyes’ of the SVO.

Duration Profile shows places the bonds in the portfolio into six pre-determined duration buckets.  Duration Attribution is calculated by multiplying the average duration in a given bucket by the market value (market allocation) and then dividing that result by the multiplication of the portfolio’s market value by its average duration.

We know the portfolio’s average duration, but how are the bonds that make up that duration determining how we get that average duration?  Are a small amount of long duration bonds pulling up portfolio duration or is it a more even spread through the different duration buckets?  Knowing where duration is occurring can provide a better understanding on how sensitive the portfolio may be to changes in the shape of the yield curve.

The top ten largest individual securities held in the portfolio, their respective market values, how much of the overall portfolio they are, their book value, credit rating, duration and maturity.  The table also sums these top ten exposures and compares that total to portfolio market value.

Diversification may be the only ‘free lunch’ in investing.  This table provides a glimpse at which bonds are the largest in the portfolio and, thus, provides an idea of what degree the portfolio is diversified.

Unrealized G/L – Fixed Income

What are gross unrealized gains and losses, as well as net gains or losses for bonds in various credit rating categories.

To the extent that your company may require taking gains or losses, their availability may be limited, not only by the portfolio’s overall net realized gain or loss position but by their availability within a given credit rating.  If gains or losses are unusually large for a given credit rating, it may be worthwhile to determine the source of such gains or losses.

Changes from the prior quarter and year in market value, book value, unrealized gain (loss), duration, book yield and market yield.

Changes in key items such as duration, book yield and market yield often come slowly on a quarter to quarter basis.  However, when viewed over a longer period, like a year, changes in duration will reveal the portfolio’s increased or decreased interest rate risk, while changes in book yield will ultimately impact investment income and bottom line profitability.

This graph arbitrarily places certain asset classes in three basic liquidity buckets:  Most Liquid, Liquid and Slightly Liquid.  It is not designed to make a judgment on specific issues within the asset classes and it does not take into account limitations past possible liquidity (such as imbedded unrealized gain/loss).  It compares this approach over the five most recent quarters.

Liquidity risk is very difficult to quantify.  This very basic approach attempts to raise the issue and be a starting point for discussions, especially as there are major changes over time or if the portfolio appears to be too liquid or not liquid enough based upon this very initial view.

Potential Impairment Report (OTTI)

Other than temporary impairment (OTTI) usually occurs when a security’s fair market value is below 80% of book value for a consecutive six months or more. However, this report screens for securities below 90% of book value, color coding the amount of book to market value percentage depending upon how serious the value drop is.

This report serves as an ‘early warning’ for such securities, as it screens for securities that are valued below 90% of book, showing key statistics including book value, unrealized loss, duration, book yield and credit rating.