Solving the Investment Risk Equation

Insurers already accept risk with underwriting. Their investment portfolios should not increase their uncertainty.

The CMO portfolio has allowed us to add some diversity in our maturities and it improved some of the cash flow performance. Overall it’s improved the return on our portfolio of fixed income securities.

Bob Hughes, Gray Insurance Company

Gray Insurance’s Bob Hughes says that fluctuating interest rates have introduced another layer of risk into the overall investment decision. He’s comfortable in adding CMOs, arguing that they help increase portfolio stability.

Both Hughes and North Star Mutual’s Joe Hoff began investing in CMOs on a limited basis. “We started with a small portfolio, about 5% of our invested assets,” Hughes said. “We’ve grown to 15%. The returns on it over those years have been very good.”

Hoff cites the importance of regular investing, saying that the portfolio can benefit by changes in the interest rate cycle.” Hoff said the portfolio’s mix of CMOs has reached about 25% of invested assets.

“We’ve been very pleased with the returns,” Hoff said. “With the introduction of more inverse floaters into our portfolio in the last couple of years they’ve performed exceptionally well with rates declining and then staying low for a particularly long period of time.”

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