Conning Builds Strong Case for Portfolio Diversification for Property-Casualty Insurers

August 06, 2015

Conning Builds Strong Case for Portfolio Diversification for Property-Casualty Insurers

With Stagnant Investment Income, Insurers Need to Examine Asset Allocation Strategies

HARTFORD, CT – August 6, 2015 – A recent Conning® analysis that models the impact of non-traditional and alternative investments on Property/Casualty (P/C) insurers’ portfolios illustrates how diversification may help optimize P/C portfolios’ risk/reward ratio under various market conditions.  

“Conning’s findings suggest the need for P/C insurers to shift their focus away from traditional perceptions of risk, and look to diversify assets,” said Scott Daniels, Head of Investment Advisory at Conning.  He also indicated that interest rates have the potential to rise in the later part of 2015, but it will take time for portfolios to respond.

“While investment income remains important to P/C companies’ earnings stability, its contribution has been eroding,” said Steve Webersen, Head of Insurance Research at Conning. ”We have seen declining investment portfolio yields for a number of years.  Combining the low yields with the industry’s decline in asset leverage means that the investment-related contribution to return on capital is near an all-time low.”  He added that investment income as a percent of earned premium is down some 20 percent since 2005.

The firm’s modeling of P/C insurers’ portfolios along an efficient frontier illustrates the opportunity to enhance economic value by considering different asset allocation strategies.  The efficient frontier analysis assessed economic value and risk (standard deviation of economic value).  It compared the performance of the total industry portfolio with three sample portfolios that included: 

  1. 100% core fixed income; 
  2. 80% core fixed income and 20% US Large Cap Stocks; and 
  3. 80% core fixed income and 20% alternative investments.

Assumed potential economic scenarios included:

  • Rising interest rates
  • Stock market crash
  • High inflation, and 
  • Continued low interest rates

“While we have seen insurers adding credit risk consistent with their risk preference, we have not seen a wholesale move in the industry towards alternatives, yet.  Many P/C companies do not have the internal capabilities that are necessary to consider non-traditional and alternative investment strategies,” indicated Daniels. He added that to be successful, insurers need expertise in developing enterprise-wide solutions that address a range of investment opportunities, focus on risk-adjusted returns on capital, enhance income in a low interest rate environment, and that fit within a constantly evolving regulatory framework.  

*About the Efficient Frontier Analyses

Frontiers were generated using Conning’s proprietary ADVISE® Enterprise Risk Modeler software.  The property-casualty industry, excluding State Farm and Berkshire Hathaway, was modeled with year end © 2012 A.M. Best Company data (used with permission).  Five years of future underwriting operations were modeled using premium growth, loss ratio and expense ratio assumptions from Conning's Property-Casualty Industry Forecast and Analysis as of the first quarter of 2013.  Volatility and loss payout patterns assumptions were based on historical industry data from A.M. Best Company.   Note that conclusions are based on broad, long term factors that are representative of current 2015 industry conditions.

The industry's financial results were projected for 100,000 five-year economic scenarios.  Subsets of 1,000 five-year projections were selected that matched our definitions of the four macro economic scenarios of rising interest rates, inflation, stock market crash, and flat interest rates.

Reward is based on average economic value at the end of the five-year horizon for the 1,000 scenarios in that macro economic scenario.  Economic value is the sum of the fair values of all assets less the present values of all liabilities plus the discounted present value of operations beyond the five-year horizon.  Reward is graphed as the percentage by which the economic values earned by an investment strategy differs from the economic value generated by the industry portfolio for that macro economic set of scenarios.  Risk is the percentage by which the standard deviation of ending economic values across the 1,000 economic scenarios for a given investment strategy differs from the standard deviation of economic value for the industry portfolio.

Three efficient frontiers were constructed for each macro economic scenario.  For the first frontier, investments were constrained to core fixed income securities.  Credit risk, structure risk and interest rate risk are the variables which affect future risk and reward.  For the second frontier, 20% of fixed income was replaced by U.S. large cap stocks. For the third frontier, stocks were excluded and 20% of fixed income was replaced with non-traditional investments. Non-traditional investments (“Alternatives”) consisted of an even weighting of Hedge Funds, Insurance-Linked Securities (“ILS”), Convertible Securities, and Master Limited Partnerships (“MLPs”).

For comparison, the result after five years for the property-casualty industry's existing investment strategy is shown for each macro economic scenario.


Conning ( is a leading investment management company for the global insurance industry, with $92 billion in assets under management as of June 30, 2015, through Conning, Inc., Conning Asset Management Limited, Cathay Conning Asset Management Limited (CCAM), Goodwin Capital Advisers, Inc., and Conning Investment Products, Inc.  The company's unique combination of asset management, risk and capital management solutions and insurance research helps clients achieve their financial goals through customized business and investment strategies.  Founded in 1912, Conning provides clients with innovative solutions, leveraging its global capabilities, investment experience, proprietary research and risk management technology.  Headquartered in Hartford, Connecticut, Conning also delivers its services globally through its offices in New York, London, and Cologne, and in Hong Kong through CCAM, a joint venture between Conning and Cathay.  

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