Two by fdjerue7eeu


Information, the U.S. life insurance companies in the portfolio average
of 15% of the mortgage, and property insurance company due to liquidity
requirements are higher, it is generally less hold the mortgage at the
same time, in order to maintain focus on paid and Emergent capacity,
property insurance companies often hold a high level of short-term
investments - short-term investment property insurance industry average
of 7-10% of total investment, while the life insurance industry is only
about 2% (Figure 10, Figure 11).

Insurance cost of capital asset allocation decision
In addition to high cyclical, property insurance industry also has
another feature, Jiu Shi underwriting business, long-term losses, and
this loss Jueding of its higher degree of investment Shouyi of Yi Lai,
Zichanpeizhi Zhong average ratio of high-yielding securities in the life
insurance Gao Yu Gong Si.
Remove license factors, insurance, especially property insurance is a
highly competitive industry - United States insurance industry through
the development of the past century, and today is still not high market
concentration, more than 2,300 insurance companies, the price war is
still the main means of competition. In this case, the premium rate is
constantly down, and eventually to the premium income is less than the
amount of compensation to form the use of insurance capital cost: The
actual award amounts + insurance companies operating costs (mainly cost
of sales) - Paul fee income = the use of insurance funds the cost - only
if the insurance funds investment returns greater than the use of cost,
only the overall profitability of insurance companies. In the U.S., long
term property insurance company average cost of funds rate was 5-6%.
U.S. property insurance industry's combined ratio (Combined
Ratio, similar to China's combined ratio, which is numerically
equal to the insurance loss ratio (insurance compensation cost / premium
income) + insurance premium rates (policy acquisition costs / premiums
income) ) data, this value higher than the 100% deduction for insurance
premiums means of advertising, insurance brokerage expenses, is
insufficient to cover the losses that the insurance company underwriting
loss - 70s of last century, property insurance The joint industry average
loss rate (Combined Ratio) is 100.3%, 109.2% up to 80 years, an average
of 90 107.8% 21 101.8% on average since, on the whole, average annual
insurance losses of around 5% ( Figure 12). The annual property insurance
industry underwriting profit (loss) data, from 1980 to 2006, in addition
to the insurance profit emergence in 2006, the calendar year, the
insurance industry as a whole is a loss, the average loss rate of 5-6%
(Figure 13).

However, insurance costs exceed the premium income of insurance companies
does not mean that the real loss, because, on average, starting from the
insured to the actual payment of the debts usually takes place a few
years (even decades) of the time, and in Meanwhile, insurance companies
can use this free premium funds (also known as the float amount), along
with the expansion of the premium scale, the cumulative amount of float
is also expanding, as long as insurance companies use the amount of float
investment income can not exceed cost of insurance, the insurance company
is profitable, on the insurance industry as a whole, when investment
income is higher than 5% (before tax), the insurance industry as a whole
have profit.
Property insurance industry as a whole is always in the
"loss" state operation, that is, the premium income is
insufficient to cover the actual award amounts and operating costs, the
difference between the use of insurance funds is the cost, as long as the
cost is lower than the average market cost of funds the insurance company
is profitable. However, low interest rate and price war era, many
insurance companies into a loss sustained in the new policy only because
the entry of the company's losses in the short term does not turn
into a liquidity crisis.
China's current property insurance industry's
profitability even worse, there has been industry-wide underwriting loss,
the face of the continuing loss insurance, individual insurance companies
are trying to improve profitability by return on investment - and the
life insurance business, particularly investment with insurance , annuity
business to earn income in different interest rate, property insurance
company's underwriting business is losing money long term, and
therefore more dependent upon investment income, in addition to 5% of
annual insurance cover the cost of capital, the major source of
investment income or , and thus, compared with life insurance companies,
property insurance companies often hold a higher proportion of equity and
alternative investments: the U.S. life insurance industry stocks and
alternative investments (real estate, private equity funds, hedge funds,
etc.) and the average of the total investment of 10%, while the
proportion of property insurance companies to reach this level of 20-25%.
Differences in insurance profitability determines the differences in
asset allocation investment business, but this difference not only for
the whole life insurance business property insurance business and the
overall difference in the performance of the property insurance industry
is also within, different investment strategies of the differences
between companies.
Insurance, investment strategy under the constraints
Although foreign property insurance industry has a higher average
proportion of equity investment, but in practice, individual property
insurance company's specific investment strategy quite different,
for example, Buffett's Berkshire Hathaway company, stock
investment accounts for 47% of total investment, In addition, 26.5% of
the private equity investment, the largest property insurance companies
and the U.S. State Farms stock investments accounted for 55% of the total
investment; but contrast, the U.S. fourth largest property insurance
companies Travellers in stocks only 0.7% of total investment, together
with alternative investments (private equity, real estate, hedge funds,
etc.), but 6.3% American Financial Group and CNA Financial
Group's shares and alternative investments, and not to 7%.
Why the difference? The greater the loss whether the underwriting
company, to make up for underwriting losses, the more aggressive
investment strategy? An average of 105% in property insurance company co-
loss rate, the insurance company's investment yield at least 5%
in order to maintain profitability, then the combined loss rate for those
up to 110% of the company, whether it should be more aggressive
investment strategy to to win more than 10% rate of return on investment?
Combined ratio and the ratio of equity investment ceiling: a negative
More mature market, various property insurance underwriting business, the
company earnings and assets, the proportion of fixed income portfolio
(including short-term investments), we find that the cost of underwriting
rate (operating cost / premium income) the higher the firm's
investment but the more conservative portfolio - in fact, those in the
past decade the average cost rate of greater than 110% of the company,
fixed-income proportion of the total investment is generally higher than
80% of the cost of those low rates of insurance companies Fandao there
were many active investment company. This seems to contradict our
intuitive sense - the more loss insurance business, the more investment
income needed to cover, why Fandao more conservative? The answer is, the
higher losses in the insurance case, the company will be forced to
maintain higher investment liquidity, and thus can not afford high-risk
investment (Figure 14).

Indeed, the insurance cost is higher than 110% of the companies, without
regard to other income in the circumstances, only when the investment
rate of 10% ÊÕÒæ to maintain profits when, but it is not enough, to reach
the required rate of return to shareholders , insurance needs to a higher
rate of return of investment. If the rate of return on investment of
insurance funds is fixed at 4%, policy acquisition costs to take the
industry average of 28%, the premium income / insurance, the insurance
company when a surplus of 140% of ROE level, only when combined loss rate
of 90-94% of The company's ROE will barely reach the level of
capital cost (U.S. property insurance company's Beta value of
0.94 times the average cost of capital at 11-14%); combined loss rate for
those over 110% in the company, to reach the capital costs, investment
income remained at an average annual rate of at least 15% or more - which
for most insurers is nearly impossible (Figure 15).

In fact, with a century history of the United States property insurance
industry average ROE levels are much lower than the cost of capital -
which led to the property insurance company's valuation is lower
than the life insurance companies, only 14 times the current price-
earnings ratio, book value is only 1.3 times (1.7 times the average life
insurance company, the financial sector average of 1.8 times the S
& P 500 average of 3.9 times), mergers and acquisitions are less
than twice the book value (Figure 16, Figure 17), underestimate the value
and high-cyclical to property insurance companies have difficulty in
issuing the stock market with low stage to make up for lack of provision
for (and therefore, the United States many large property insurance
companies, such as State Farms, Liberty, etc. prefer to keep private non-
listed state), the company more with their own income balance to maintain
solvency, which requires more robust investment performance.
In short, in the case of higher insurance costs, property insurance
companies want high returns on investment to make up for the practice of
the insurance losses can only be the company faces a double threat - to
keep more than 15% long-term rate of return on investment is not only
difficult to achieve, and higher risk, a gamble strategy. Aware of this,
those high-cost insurance Fandao chose the more conservative investment
strategy, expect long-term through operational adjustments to reduce the
insurance costs.
Practice, in order to ensure ability to pay insurance, property insurance
companies will usually be divided into two parts, the investment account,
some companies will be referred to as the two accounts, "match
the account balance" and "risk income
account", the former in order to meet Insurance cover needs for
the purpose, and to fixed income investments and the latter in order to
enhance the overall level of the target rate of return to equities and
alternative investments.
For those higher insurance costs, underwriting losses larger companies,
to meet the needs of the insurance to pay more money needs to configure
the first account, the corresponding proportion of high-risk assets on
the lower; Conversely, only those relatively conservative Dingjia or
insurance companies have special marketing channels, premium income to
cover the basic cost of insurance as a result, less pressure on the first
account, a lower proportion, the second large choice accounts, which have
the ability to conduct high-risk investments.
In summary, the cost of insurance is property insurance company to take
control of more active investment strategy based on costs in the
insurance business, a high rate of severe cases loss of the investment
business will be significantly restricted freedom, the company can take a
more conservative operating strategy to maintain the survival of the
whole operation. U.S. insurance rating agency AMBest study also showed
that the error of insurance pricing, leading to rapid market growth is
the most important reason for the insolvency insurance (Figure 18), there
is no basis for insurance, there is no freedom of investment .

CNA Corporation: conservative strategy under an underwriting loss
CNA Financial Group was founded in 1967, 1995 acquisition of Continental
Insurance Company, Main property insurance business, including the
standardization of traditional insurance products and special insurance
products (health care liability insurance, liability insurance managers,
financial products, security, etc.), non-core services including life
insurance business and other businesses. Parent company, Loews
Corporation is a major diversified U.S. investment company, holds 89%
stake. 2007, CAN ranked the nation's 13 largest property
insurance companies, and 7 of the largest commercial insurance companies.
Despite the strong background of shareholders, but CNA's
underwriting performance has been unsatisfactory, the 2007 rate of 107.9%
combined loss, which previously had reached 120.9% in 2005, 2003, when it
is up to 150%, over the past 5 The average loss rate of 118% of joint
(ie, the average loss rate of 18% of the insurance business, or the use
of insurance funds the cost of up to 18%) (Figure 19), in the past 10
years, premium income and operating costs than the average of 128 %.
In addition to high insurance costs, performance of high volatility has
been plagued CNA. The company in 1992, 1993, 2001, 2003 and 2005 have
appeared more than 1 billion U.S. dollars of underwriting losses,
together with investment income, still in 1993, 2001 and 2003 saw an
overall loss, earnings per share and net return on assets is also
volatile (Figure 20, Figure 21). The company's bond rating
businesses at the edge of junk bonds, stock Beta value reached 1.5 times
higher than the property insurance industry average of 0.94 times. High
insurance costs and high volatility experienced in the capital markets
the company discount, since listing, the stock yield is close to zero,
significantly lower than the Allstates, Travellers and other property
insurance companies, the current price-earnings ratio of 10 times lower
than the property insurance industry average of nearly 30%, 0.76 times
book is lower than the industry average by almost 40% more (Figure 22).

Insurance losses, low credit ratings and low capital market valuation of
the company to make it difficult for CNA continued low funding to address
the issue of the capital, the company is the only way to maintain the
sound investment insurance business, so as to striving for more time to
resolve the issue of insurance on the loss.
The reality also is the case, the high cost forced the CNA insurance
business in the more conservative investment strategy to maintain the
stability of ability to pay. The 42 billion U.S. dollars of total
investment assets, 82% bonds, 11% short-term investment, only 1.4% of the
shares and 5.3% alternative investments. In the fixed-income securities,
AAA grade securities accounted for more than 50%, 89% of investment-grade
bonds, half of the bond investment period of 5 years, 30% of the bonds
over 10 years investment period (Figure 23, Figure 24). In the past
decade, CNA has maintained a relatively conservative investment strategy
that, even in 1999 and 2006 bull market in U.S. stock market,
CNA's investment structure is not configured with the stock
market while undergoing enormous transformation change (Figure 25).

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