A-CAP Management believes Liquidity Risk is the best risk for insurers to take as Insurance assets and liabilities are not marked to market for capital charge purposes (other than if an impairment is required), Insurance liabilities have longer average lives than assets typically, and some portion of the insurance company will be in liquid assets should cash need to be raised (~20%). In today’s environment, interest rate asset yields are less than liability yields, making interest rate risk a bad risk for insurance companies to take on. Credit risk is a bad risk for insurance companies to take as defaults cannot be planned for and are always realized losses to surplus.
When making investment decisions, ACM looks to ensure: capital is used in an efficient manner as it is a scarce resource; capital earns a sufficient return: managing an insurer inefficiently will result in required returns not being hit; and every asset decision and every liability decision takes into account the (i) profitability and (ii) capital usage to ensure capital can be repaid with its return.
There are several regulatory constraints placed on an insurance company’s investment capabilities. A-CAP Management executes specific investment strategies in order to satisfy these constraints.