Supporting the Portfolio CMOs can play a strong supporting role in a diversified investment portfolio.


For a well-capitalized company, you’re going to make your investments based on what return you can make over the long run. Bob Hughes, Gray Insurance Company


For most property/casualty insurers, the largest component of their investment portfolio remains traditional bonds.


North Star Mutual’s Joe Hoff said he has grown his position in CMOs until it is currently the second-largest holding, behind straight agency bonds. “We have a pretty good investment in Treasuries and then smaller holdings in high-grade corporates and some high-grade municipals,” Hoff said. “We also have about a $40 million dollar stock portfolio. We’re pretty comfortable with that split right now.”


Gray Insurance’s Bob Hughes said the investment in CMOs is made with loss reserves in mind. “What they’ve allowed us to do in our fixed security portfolio is enhance our return so that our overall return is north of 5% and that gives us a pretty good return in this environment.”


Rather than strictly matching investments against liabilities, which is a popular strategy with life insurers, Hughes said property/ casualty insurers often aim for long-term growth while remaining liquid to meet short-term needs.


“We do a small amount of laddering, using our treasuries and agencies and some of the more standard bonds to ladder out some maturities for the short term just to make sure we have sufficient cash flow,” Hoff said. “We don’t really look at the CMOs as an integral part of that need for us.”


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