September 18, 2012 by Canadian Underwriter
More than half (53% ) of chief financial officers said their companies’ investment risk profiles were at or near their stated risk tolerance limits, according to survey results released this month by Towers Watson.
The report, which looked at CFOs perspectives on investment strategies, suggests the remaining 47% of companies were significantly under their limit.
“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,” Karen Wells, a senior investment consultant with Towers Watson noted in a statement.
Principal preservation, total return are key for coming year
Principal preservation and total return ranked as the most important elements of portfolio management, according to the survey. However, satisfaction levels differed— while about 75% of respondents said they were satisfied with the principal preservation outcome, only 23% were satisfied with total return.
Liquidity and the ability to pay claims ranked third with 85% claiming they were very satisfied with how their companies met that objective. CFOs are also satisfied with their companies’ performances in investment management governance, with 78% saying they were very satisfied, according to the survey results.
Only a third of CFOs said their asset and liability durations are matched within a year of each other, with 19% shorter on assets by more than two years. Another 19% were longer on assets by more than two years, according to the results. All of the survey respondents have the majority of their portfolios invested in cash equivalents and core fixed income.
Low interest rates a challenge
The biggest challenge over the next few years will be low interest rates, according to the survey results. However, the risk of rapidly rising rates would also present a challenge, and market volatility also remains a concern.
In the coming year, 31% of CFOs expect their companies’ investment strategies to become slightly more aggressive, although none expect to take on a more aggressive investment posture.
“CFOs with P&C insurers are facing current investment challenges, which are inherent to their dual requirements of ensuring that their companies withstand today’s adverse market conditions while still meeting the expectations of rating agencies and regulators,” Stuart Hayes, a senior consultant at Towers Watson noted in a statement.
“The responses from our survey illustrate that capital appreciation and investment income aren’t sufficiently contributing to P&C insurance company returns levels needed to adequately please their investors.”
The survey is Towers Watson’s third North American CFO survey and included participation from P&C companies of varying sizes. It was completed between mid-May and mid-June of 2012.