CHICAGO--(BUSINESS WIRE)--The property/casualty (P/C) (re)insurance industry continues to maintain high-quality investments with sufficient liquidity to meet and settle claims in a timely manner. Generally, (re)insurers' core investment strategies continue to minimize credit risk and the potential for balance sheet volatility, according to the Fitch Ratings report: 'Investment Risk and Returns - Property/Casualty (Re)Insurers'.
The report analyzes investment holdings and performance data on a GAAP basis from 2008 - 2012 for 48 holding companies with P/C (re)insurance operations. The study compares asset allocation across companies and examines differences in investment performance and volatility over the last five years, focusing on investment yield, total investment return and the investment contribution to return on equity (ROE).
Generally, investment portfolios of P/C (re)insurers are high quality with investment-grade bonds and short-term investments at 73% and 11%, respectively, of cash and invested assets at year-end 2012. Higher risk asset classes for the aggregate study group were equities (7%), below investment-grade (BIG) bonds (4%), mortgages and real estate (1%) and other (4%).
P/C (re)insurers maintain relatively lower investment leverage compared with life insurers and other financial institutions, which reduces the potential volatility of investment results on economic value creation. The ratio of invested assets to shareholders' equity averaged 2.9x for Fitch's universe at year-end 2012. Several multiline insurers in the group had asset leverage of 4 - 6x.
For the group, investment yield has declined steadily from 4.1% in 2008 to 3.4% in 2012. For some companies such as Fairfax Financial Holdings Limited, realized and unrealized capital gains are a primary component of its corporate strategy and boosting its total return ranking to fourth, despite ranking near the bottom of the study group in investment yield. Other companies with higher than average capital gains were Alleghany Corporation and Platinum Underwriters Holdings, Ltd.
For the group, total return was -1% in 2008, rebounded to 8.0% in 2009 and ranged from 4.6% - 5.4% in 2010 - 2012. Companies with the lowest average total return experienced more severe losses during the sharp market decline of 2008.
Interest rate risk presents a greater source of near-term market value uncertainty relative to credit risk in bond portfolios. Large unrealized bond portfolio gains that were prevalent at year-end 2012 have eroded in the first half of 2013.
The full report, 'Investment Risk and Returns - Property/Casualty (Re)Insurers' is available at 'www.fitchratings.com' under the following headers:
Sectors >> Financial Institutions >> Insurance >> Research
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research: Investment Risk and Returns -- Property/Casualty (Re)Insurers