In the past few years there have been difficult times in the economy as well as many changes unique to the insurance investment arena. In the last half of 2009, SSAP 43R was released by the NAIC. This new regulation allows insurance companies that can hold assets to maturity to mark lower credit mortgages to the present value of discounted future cash flows. Also, the NAIC hired PIMCO to develop a rating grid matrix on all RMBS issues held by U.S. insurers. This move shifted the historical dependence from the rating agencies to security exposure risk that the holding presents to the insurer. SSAP 43R and other rule changes demonstrate the need for an insurer to return to conservative approaches and focus on cash flow and book yield.
Since the peak of the recession, a general improvement in the markets has occurred. Some lingering effects still remain for many insurance companies. Specifically, there are certain collateral types such as residential loans and Alt-A paper originated in 2006 and 2007 that are still experiencing increasing defaults in the underlying loans. However, the general marketplace has yielded moderate improvements. While some economists and technical analysts are concerned with a possible double dip, the majority predict a stable environment with continued improvements in the mortgage arena.
One of the biggest struggles for insurance companies is maintaining investment book yield. Although rates have stepped up from their lowest levels, reinvestment is likely below the average portfolio yield. It is important for insurance companies to remain faithful to their investment plan in times such as these. Although the pressure to grasp for book yield is high, stay the course with the long-¬term plan. Moreover, diversification plays a large part in maintaining book yield. Not only should diversification be considered for asset classes, but also time of purchase as well as placement along the curve. Investing in this manner will allow for various types of investments being purchased across the curve at a variety of differing times. This will lead to greater diversification and has historically proved important to assisting in the preservation of book yield.
Parkway Advisors, L.P. is an investment advisor registered with the Securities and Exchange Commission offering investment management, consulting, and accounting and reporting services. This material is for your use only and has not been independently verified and thus we do not represent that it is complete and should not be relied upon as such. The opinions expressed are our opinions only. Past performance is no guarantee of future performance and no guarantee is made.
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