In my answer I tried to be generic and probably won’t be as long-winded on the exam. It all depends on what’s provided in the vignette. In all likelihood, I probably wouldn’t actually mention specific security classes in liquidity or time horizon unless asked for or necessary to support my stance. I included all the info just to show you the reasoning of where I was coming from.
Fair enough… I figured you were doing so for explanatory purposes. What about the segmentation of the portfolio as I mentioned above. Where do we mention those specific segments throughout the IPS?
I think if there’s enough information in the vignette addressing each portion of the portfolio, then I’d say go ahead and break it down. However, from all the tests I’ve taken so far, there is no consistency. I agree with you that from a general standpoint, the time horizon and liquidity of the surplus can be long and nil, respectively. However, in the general sense, if there is a large pending claim from an event such as a hurricane, the time horizon and liquidity requirements in general become short and high, respectively. That is because you may actually need to liquidate a portion of your surplus to meet the immediate claims. It’s subjective to say the least.
for non-life, the amount to be disbursed for a claim in unknown, so they attempt for long duration/high returns.
CareerChange Wrote: ------------------------------------------------------- > for non-life, the amount to be disbursed for a > claim in unknown, so they attempt for long > duration/high returns. I believe that is incorrect sir
ws Wrote: ------------------------------------------------------- > The “rational” is the non-life company need to > gain as much as they could in the short-term > period. csk, didn’t ws just say the same thing?
i believe ws is incorrect as well. I believe rational for longer durations not gain more, but because of tax advantages it is better to hold tax exempt bonds with longer duration. So they are not extending duration on purpose, it is rather a side effect of holding tax exempt bonds I might be wrong
i think some really smart dude posted that same comment at 10:51am agreed
I still think taxes should always be a secondary consideration to risk tolerance. If it’s short-term time horizon, use short duration bonds, even if you’d benefit from tax efficient investments elsewhere that have longer durations.
CSK, Well, since non-life firm is a taxable entity. What is a good reason to take advantage of the tax-advantage of the numi-bond? Because if offer a higer after-tax yield (gain), would you agree on that? That is why I still would think that gain advantage of long-term numi causes non-life to hold more long-term maturity bond. Why would they hold long-term numi bond if ther is no yield/gain advantage? I think non-life insurance company is FORCED to do this, not by choice.
which is why i come back and gasp - agree with schweser - - that the simple answer to this long thread is that the time horizon is short/intermediate - period. on to the next constraint - - no need to explain, full points - - interesting but beyond the scope of the information needed that they happen to invest in munis - - maybe that is an afternoon question and now we all get it - - but for constraints in the AM, i’m going with short/intermediate as dictated by liabilities.
I understand Non-Life as short to intermediate. Liquidity needs for uncertain claims mean they can’t just lock all their stuff up for the long term. I remember Stalla saying something about having a small amount of assets for “long tail risk,” which had something to do with the fact that a small proportion of claims would involve lawsuits and take years to settle, and that therefore a small proportion of high duration assets would be useful to offset this risk.