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July 201

The survey was undertaken against the recent

backdrop o relatively strong capital market pricing,

but continued heightened uncertainty over general

economic conditions and interest rates.

Respondents represented property & casualty, and lie

and health insurers, with a majority reporting general

account invested assets o more than US$1 billion.

Key Findings

More than two-thirds o the insurers surveyed said

that the most important aspect o investment

strategy is applying the best ideas to fxed-income

portolios. Interest rate uncertainty tops the list o concerns

as asset managers wrestle with low rates, but ear

ination may loom ahead.

Nearly hal o the insurers surveyed expect to

deploy slightly or even signifcantly more aggressive

investment strategies over the next 12 months.

Approximately two-thirds o respondents outsource

at least part o investment management, with most

seeking better perormance, lower costs and access

to specialized strategies.

The need or best ideas or fxed-income portolios

was cited by 71% as the key aspect o investment

diversity. Ination protection was a distant second,

with an 11% response; emerging market wealth

ollowed at 9%, with better net-o-ee results in hedge

unds at 6% and tail-risk protection at 3%.

Given ragile economic conditions and sustained

low interest rates, especially in the United States, its

clear that insurance companies are challenging their

investment experts to express their best ideas in the

portolio, said Christopher DeMeo, head o Towers

Watson Investment in North America. For example,

he noted that some insurers are developing a total

return mindset instead o a benchmarked fxed-

income strategy.

I think this will continue to be a very important theme

over the coming years, he said.

When asked to identiy their biggest investment

challenges, respondents overwhelmingly pointed tolow interest rates that reduce prospective investment

income while driving up the expected cost o uture

liabilities. However, more than hal o the respondents

listed the risk o rapidly rising interest rates as the

second biggest challenge, suggesting that ears o

ination are widespread. Financial market volatility,

ination hedging and credit risk were also listed as

challenges.

Interest rate concerns are a act o lie or insurers,

and the current low interest rate environment has

undoubtedly added to their perormance pressures,

said DeMeo. Its somewhat surprising to see the

degree to which the respondents seem to worry about

ination. Given the sluggish economy and sustained

low interest rates, we believe that ination risk in

the near term is lower than many predict and, in

act, deation should be considered in any planning

scenario.

Nearly half of the insur

surveyed expect to depl

slightly or even significa

more aggressive investm

strategies over the next

12 months.

InsightsInsurer Investment Practices

Towers Watson recently completed a survey of North American

insurers that examined current investment management practices,

including the outsourcing of investment services, as well as

potential changes in investment strategy over the next year.


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Insights | July 2011

Respondents Lean Toward MoreAggressive Investment Strategies

When asked to break down invested assets by asset

class, taxable fxed-income investments ranked

frst at 60% with the ull sample and at 77% among

ie (re)insurers. Tax-exempt municipals (11%)

were ollowed by cash and high-yield fxed income.

Common stock was pegged at 8%, with the balance

spread among real estate, hedge unds and other

classes.

While the heavy emphasis on fxed-income

nvestments is to be expected among insurers,

survey fndings also indicate that many insurers

are leaning toward a more aggressive investment

strategy. When asked i they expect investment

strategies to change over the next year, nearly hal

o the respondents said they expect to be slightly or

even signifcantly more aggressive. Only 9% expectto be more conservative. Nearly 40% expect to

ncrease their holdings o alternative investments.

Its meaningul that a substantial number o

nsurers expect to embrace a more aggressive

nvestment strategy at a time when they are clearly

worried about the economy and fnancial market

volatility, said DeMeo. Finding the appropriate

balance between investment perormance and risk

will be key to successul implementation.

Outsourcing Varies Among

Asset ClassesApproximately two-thirds (68%) o survey respondents

reported that they outsource investment management

or some or all o their general account invested

assets, with lie insurers somewhat more likely to

rely on external investment advisors.

Outsourcing also varied among investment classes,

with advisors more likely to manage hedge unds,

private equity, high-yield fxed income and common

stock. Lie insurers were also more likely to

outsource investment management or preerred

stock and tax-exempt municipals.

Hal o the respondents said improved investment

perormance was the reason or outsourcing

nvestment management, while nearly a quarter

(23%) cited a desire to reduce overall costs.

Outsourcing was also listed as a way to access

specialized strategies and expertise, and to cope

with the difculty in attracting or retaining internal

sta with the necessary experience and skill sets.

Fewer respondents turn to independent advisors

to help decide how to implement an evolvingoverall investment strategy or to select an outside

investment manager (42% and 28%, respectively).

In-house investment management resources

are needed as a core competency or to achieve

greater control and transparency while managing

investments, respondents said. Nearly one-quarter

said they believe an in-house approach is a lower-

cost solution. Approximately 20% o respondents

said it is becoming more difcult to attract and

retain asset management talent.

Investment Goals Focus on Liquidityand Principal Preservation

Asked to rank investment objectives, a plurality o

respondents (28%) put liquidity at the top o the

list, ollowed closely by principal preservation two

policyholder-related objectives that are essential or

insurers that need the exibility and wherewithal to

pay claims. Total return was cited by 20%, with book

income ourth at 17%.

More than 80% o the respondents said they are

very satisfed with their portolios ability to meet

liquidity objectives, and 71% were very satisfed

with principal preservation. The numbers declinedsharply to 40% when respondents were asked

i they were very satisfed with total return objectives

and reaching capitalization targets. Only 28% were

very satisfed with their ability to meet book income

objectives presumably a reection o todays low-

yield environment.

More than 80% of the

respondents said they are very

satisfied with their portfolios

ability to meet liquidity

objectives, and 71% were

very satisfied with principal

preservation.


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Satisaction levels with portolios were roughly

equivalent among respondents that outsourced and

those that managed assets in-house. Slightly higher

percentages o respondents were satisfed with

n-house management or principal preservation and

total return.When asked to list elements or investment

success, respondents ranked asset allocation frst,

ollowed by adequate risk management and good

governance. Investment diversifcation was ourth,

ollowed by portolio construction process and costs.

Respondents tend to be more satisfed with their

portolio construction. They tend to be less satisfed

with investment diversifcation. The most important

actor or investment diversity is applying the best

deas to fxed-income portolios, 71% o respondents

said.

Governance-Related Practices Vary

Only 14% o respondents ranked good governance

as the top element o investment success. While

risk management a vital element o good

governance, to be sure scored higher at 26%,

the survey results also turned up fndings that

might suggest ways to improve governance. For

example, some respondents appear to rely on a

single executive or two to oversee implementation

o investment strategy when a larger team or

committee might be more eective.

Three-quarters o survey respondents reported thatnvestment strategy is overseen by an investment

committee or subcommittee, with others relying

on directors or senior management. Investment

committees consist o six members on average,

although 25% o respondents reported ewer than

fve members.

About hal o the survey respondents reported that

their investment committees meet quarterly, with

23% reporting monthly meetings and 15% reporting

weekly meetings.

Heavy reliance on modeling tools or robust

decision making may, at least in part, explain why

governance isnt ranked higher, DeMeo said. I

think there is sometimes the eeling that, I the

tools are deployed, then weve sized up the risk, and

were covered. But there are times when there is no

substitute or qualitative judgment and investment

expertise. Strong governance is one way to achieve

this balance.

Towers Watson Investment

Towers Watson Investment creates fnancial value

or institutional investors by oering independent

investment advisory services. We provide investment

advisory services to some o the worlds largest

institutional investors, and have more than 600

associates in Europe, the Americas and Asia.

About Towers WatsonTowers Watson is a leading global proessional

services company that helps organizations improve

perormance through eective people, risk and

fnancial management. With 14,000 associates

around the world, we oer solutions in the areas o

employee benefts, talent management, rewards,

and risk and capital management.

About the SurveyThirty-eight insurers participated in the online survey, which examined

insurance asset management with a ocus on the outsourcing o investment

management. The majority o respondents in the online study, which was

conducted in April and May 2011, had general account invested assets o

more than US$1 billion. Chie investment ofcers or their equivalent ormed

the plurality o respondents, with the balance consisting primarily o CFOs

and treasurers.

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