Asset/Liability MatchingParticipants were asked how closely matched their companies’ assets and liabilities are, and surprisingly, only one-third said their companies’ assets and liabilities are matched within one year of each other. In fact, 19% disclosed their portfolios are shorter on assets by more than two years, and another 19% indicated their portfolios are longer on assets by more than two years. “The current yield-curve structure appears to be leading different companies in different directions,” said Karen Wells, senior investment consultant, Towers Watson. “On one hand, the steep yield curve and the Fed’s indication it will not raise interest rates in the near term have led some P&C insurers to extend out the yield curve to pick up incremental return. Other companies have positioned their duration short, waiting for yields to rise while avoid locking their assets into today’s relatively low yield.” When respondents were questioned as to what degree their investment management was outsourced for each of its general account invested assets, CFOs revealed it largely depended on the difficulty of managing particular asset classes. For example, five out of six respondents that listed hedge fund assets as an investment also outsourced that part of their portfolios. However, for core fixed-income investments, only 63% of CFOs said their companies completely outsourced the responsibility for managing that sector of their portfolios. CFO Concerns Over the next three years, all respondents expect low interest rates to be their companies’ biggest challenge. Paradoxically, half of the CFOs expect the risk of rapidly rising rates will also be their biggest challenge. “This dual interest rate risk reflects two extreme cases: historically low yields and the potential for rapid rate increases if the Fed and fiscal policymakers don’t steer the economy carefully,” added Wells. Half of the CFOs surveyed also indicated that market volatility remains a top concern. “This reflects the continuing financial crisis, which promises to remain a part of the investment landscape due to financial weakness in the European Union and the possibility that the global economy could face a new recession.”
Risk ToleranceTo round out the results, CFOs described how their companies’ investment risk profile compares to its stated investment risk tolerance limit. While no respondents are over their limit, 53% expressed that their companies are at, or near, their risk tolerance limit, and only 47% are significantly under their stated risk tolerance. “The fact that just over half of our survey participants said their companies were near or at the limit reflects just how challenging it is to generate respectable returns and still stay within guidelines acceptable to stockholders and rating agencies,” said Wells. About the Survey Thirty-two CFOs from P&C insurance companies participated in Towers Watson’s third North American Property & Casualty Insurance CFO Survey, which was conducted between mid-May and mid-June 2012. Survey respondents represent a variety of business types and ownership structures. CFOs represented local and regional carriers, along with national carriers and multinationals. Respondents represent a cross section of companies of all sizes and a variety of distribution systems. About Towers Watson Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.