Predominant product: Accident & Health
Problem: Insurer had utilized manager for over a decade and was never provided with sufficient information to judge performance. In addition, overall asset allocation strategy was subject to criticism.
Solution: After reviewing the current manager’s capabilities, SAA recommended the establishment of a detailed investment process that focused on key areas of the investment process value chain. Specifically, the investment policy was rewritten to take into account the company’s historical and projected reserves as well as capitalization level. An asset allocation analysis revealed that a rebalancing among different asset classes would be worthwhile. Investment benchmarks were established that focused both on total return and investment yield. SAA calculated total return to compare historical performance with other similar strategies.
Result: The company’s investment performance is now measured against reasonable benchmarks tied to its key performance metrics. The investment manager is now more focused on meeting the company’s requirements and reports regularly and accurately on performance. Investment performance results have precipitated an ongoing reassessment of asset allocation strategies. SAA provides ongoing portfolio monitoring to make certain that the company is fully aware of the hidden risks in the portfolio.
Predominant product: Annuities
Problem: Investment group had purchased existing insurer and wanted to significantly increase annuity production without taking on unprofitable business.
Solution: After reviewing the company’s current capabilities, as well as those of its affiliated fixed income manager, SAA recommended the establishment of a detailed investment process based upon a risk management approach. This started with an understanding of the inherent risks of the existing and new annuity lines of business. From this, an asset allocation analysis was performed focused on achieving the highest expected return on surplus, adjusted for risk. The investment policy was completely rewritten, including a derivatives usage policy. Benchmarks were established tied to both total return and yield requirements. Annuity pricing parameters were established that included target spread and yield requirements.
Result: The company’s investment requirements were successfully made part of the modus operandi of its affiliated investment management firm. Communication between the insurance company’s operating team and the investment manager improved significantly. Annuity pricing and product design became a collaborative process focused on risk management. Annuity sales increased though not so much as to produce sales that did not achieve ROE targets.
Life Insurer (Reinsurance)
Predominant product: Interest sensitive products
Problem: Newly formed reinsurer required an investment grade rating from at least two major rating agencies in order to be seriously considered in the marketplace.
Solution: After reviewing the company’s business plan, senior management capabilties and overall direction of the company, SAA agreed to assist in obtaining these ratings. SAA assisted in preparing the ‘book’ for presentation to the ratings agencies, suggesting changes in current operating procedures that would assist in a successful result. In addition, SAA reviewed and recommended changes to the company’s risk management and investment processes and procedures.
Result: The company’ received an investment grade rating from two major rating agencies, including AM Best. As a new insurer, this accomplishment iis considered relatively rare.
Predominant product: Whole life insurance
Problem: Insurer had selected an investment manager about a year and a half before speaking with SAA and was already disappointed in the manager’s results. The company had experienced material credit losses in an environment of very few credit losses.
Solution: After reviewing current manager’s capabilities, SAA conducted an investment manager search focused on credit management, sector knowledge, performance and overall risk management processes. Subsequently, SAA monitors manager performance, monitors portfolio for potential hidden risks, and prepares a detailed peer group review analysis.
Result: The company’s communications with its new fixed income manager were much improved, while the manager achieved returns adjusted for risk, in excess of the benchmark. SAA continues to review the investment process for additions to the manager’s current style and the company’s risk appetite for changes in its equity portfolio.