Top of page 426 in the cfa books, it says that non life insurance companies tend to invest in longer maturity bonds than life insurance companies. I am not able to understand why they MUST invest in longer maturities to optimize the yield advantage. If the yield curve is more positively sloped, then doesnt it mean that there is a yield advantage everywhere on the yield curve(both short and long) ?
+vely sloped yield curve means there are greater yields available at long maturities than short maturities
Don’t exactly follow what you mean
On a relative basis the yield is steeper.I am assuming somewhere in the medium term it must be higher… My main question was, why do non life nsurance companies invest in longer term duration than life insurance companies? If we take the ALM perspective one would want to match the shorter duration liabilities with the the assets…
Is it because they have less regulatory restrictions regarding bond quality? I imagine longer-term bonds from the same issuer would get a lower rting that shorter-term bonds.
Hi Zanalyst , I looked at the book and you are correct that is what it says. I am an insurance analyst and i can confirm that is not what happens in reality so I think the book has it the wrong way around. Plus it flies in the face of the reason for ALM
Also non life insurance company may have greater liquidity requirements than life insurance and for this reason their maturities should be shorter.
Zanalyst and Allstatsandy are correct. The NAIC study ( link below ) says that life companies have liability maturities longer than non-life and accordingly their investments are more heavily into 30 year bonds.
The NAIC Capital Markets Bureau studied the insurance industry’s portfolio mix across the five general insurance company types (life, property/casualty, fraternal, health and title) as of year-end 2010, year-end 2008 and year-end 2005. Depending on the insurer type, portfolio compositions could vary, due mostly to appropriately matching assets to liabilities and taking into consideration relative duration and liquidity risk. For example, life companies have longer-term liabilities than property/casualty companies; therefore, the former invests more heavily in longer-term assets, such as bonds with 30-year maturities, than the other industries.
I think these facts have changed since the time of CFA’s study on pg 426. The table shown there is as of 2004 . The NAIC study is over 3 years , 2005 , 2008 and 2010 .