Investment Management Critical For P&C Insurers, Best Says

Property and casualty insurers will show an increased appetite for investment risk this year as they seek to boost returns on capital, A.M. Best Co. says.

"However, we do not expect p/c insurers to make massive changes to investment portfolios," the insurance industry rating and information company says in its upcoming 1999 Review-Preview supplement to Best's Review and BestWeek. "Any additional risk will likely be incremental, in light of fierce underwriting competition."

Market conditions in the 1990s have highlighted the role of the investment manager, A.M. Best says. Investment management has become critical to ensuring long-term profitability and surplus growth.

"This role was evidenced in the early 1990s, when some insurers harvested capital gains on long-term bond holdings to supplement cash shortfalls from higher underwriting losses and catastrophes," the report says. "Other insurers had to reinvest those long-term bonds that were called, due to the declining interest rates at that time."

In the mid-1990s, A.M. Best continues, "many investment managers struggled to manage volatility and maintain yield without compromising credit quality."

Declining interest rates have encouraged managers to trade actively at least part of their bond portfolios, the report says. In addition, common stocks have been widely used to achieve surplus growth; their returns have offset declines in underwriting results.

Small and medium-sized companies increasingly have been outsourcing part of their asset-management function; larger insurers have shown increased interest in acquiring and partnering with investment firms to manage part of their invested assets or gain access to asset-liability management skills. In 1998, for example, American International Group, NAC Re and Swiss Re announced plans to acquire stakes in specialized asset-management firms.

"We expect these acquisitions, strategic partnering and outsourcing trends to continue," A.M. Best says.