have reflected dramatically changing investment markets and yet, despite the difficult market conditions, Bermudian insurers have still produced positive investment returns.
However, there would appear to be wide discrepancies in investment
strategy year to year as refl ected in published returns, perhaps confi rming that there is a lack of investment risk analysis and insight other than by the most sophisticated fi rms. Chart 2 shows that in 2009 and 2010 results for selected listed insurers varied between 3 and 10 percent.
CHART 2: INVESTMENT RETURNS 2009 AND 2010
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
Fixed Income Pref & Common Other
Short Term Cash
CHART 3: ASSET ALLOCATION OF FIVE MAJOR INSURERS, 2010
2010 2009
ACE
Partner Re
Arch
Alterra
Montpelier While all had a consistent allocation to long-term fi xed income, there was
a signifi cant divergence in allocations to short-term bonds, cash, equity and other, refl ecting an increasing appetite for alternative investments.
Looking further at the possible cause for divergence of returns in
2009-10 it can be seen in Chart 4 that quite dramatic switches were made by some to try to capture the rapidly changing investment markets and the greatest diversity.
It is worth recalling that at the start of 2010 considerable uncertainty
persisted from the financial crisis and that strategies were put in place either to take advantage of the unwinding of the dislocation or to mitigate the risks that became apparent during the crisis. By the end of 2010, the disparity of returns between cash and bonds became very marked, particularly as short-term interest rates were held low by central banks and as the overall returns were higher from bonds driven by spread contraction which had started in 2009.
Although equities delivered acceptable returns during the
year—the MSCI World Index returned 9.6 percent—hedge funds outperformed, with the Dow Jones Credit Suisse Hedge Fund Index up 10.95 percent overall. Despite the positive overall return for alternatives, there were many hedge funds which underperformed considerably, highlighting the challenges of picking the winners and losers. Those who chose to invest in alternatives faced the challenge of avoiding volatility while reaping the benefits of additional returns over traditional investments.
Looking into the causes of this disparity of investment results, Chart 3
shows the different asset allocations of the five quoted insurers, which indicate their very different risk profiles and risk appetites.
CHART 4: CHANGE IN ASSET ALLOCATION OF FIVE MAJOR INSURERS
10 15
-15 -10 -5 0 5
ACE
Partner Re
Arch
Alterra
Montpelier
Cash Short Term Fixed Income Pref & Common Other If we look forward from here, however, it is hard to see how such
conservative investment strategies can continue to generate similarly positive returns. Cash is generating close to a zero return, government bond yields are expected to start rising soon and credit spreads are at much tighter levels than in recent years.
Spring 2012 | INTELLIGENT INSURER | 27
ACE Partner Re Arch Alterra Montpelier
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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