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Insurance Finance & Investment UPDATE

Executive Briefing on Events Driving Insurance Finance & Investments

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Recent Articles:

NAIC To Mandate Regulatory Approval of Internal Control Procedures For Derivative Transactions – Derivative Use Plans

Excerpt from Insurance Finance & Investment by Michael P. Goldman and Scott J.F. Goldstein, Sidley Austin LLP

Managing Derivatives Operations in Insurance Companies

Excerpt from Insurance Finance & Investment by Ernst & Young

Turning to Alternatives

Excerpt from IFI's Exclusive Interview with Eric Kirsch, Head of Goldman Sachs’ Asset Management Global Insurance Asset Management Group

Looking Beyond the Accounting Changes for Life Insurance Companies

The implementation of IFRS 4 in some markets has required insurers to develop a deeper understanding of their products by examining their entire books of business to enable the classification of products as insurance contracts or financial instruments. It has also brought to light the fact that, in many markets, insurance companies have historically not properly or explicitly charged for certain product features, such as options and guarantees on life insurance products, because they thought the features would always be out of the money.

Small Insurers Stay the Course

Strategic Asset Alliance, an insurance investment consulting firm comprised of former Chief Investment Officers of insurance companies, specializes in advising small and medium-sized insurers on their investment needs. Alton Cogert, President and CEO, recently spoke
with IFI about the market for subprime securities and potential investment opportunities for smaller insurers.

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Using Derivatives to Enhance the Opportunity Set for Fixed Income Investing

The growing complexity of fixed income and currency markets suggests that investment professionals should employ as broad an array of investment instruments and strategies as possible in order to maximize the efficiency of their portfolios. One of the main reasons behind this is diversification. We believe that a diversified set of investment strategies helps to ensure that no one instrument – or segment of the market – is dominant within the portfolio, allowing for potential excess returns across a number of strategies. When diversifying their portfolios, managers should also consider correlation levels within the opportunity set. The lower the correlations of excess returns, the greater the diversification benefits. In turn, this should result in a higher information ratio for the overall portfolio.

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So Long GAAP, Hello IFRS

The timeline for convergence of the U.S. Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) is accelerating. It was recently reported that Robert Herz, chairman of the U.S. Financial Accounting Standards Board (FASB), is aiming for convergence of the two systems by 2011 or 2012. While this may sound like an aggressive timetable, many of our trading partners are already implementing the shift to IFRS. For example, Canadian Generally Accepted Accounting Principles, the current basis of financial reporting for public companies in Canada, must be replaced in public reporting by the international standards by 2011.

Trade and Insurance

Insurance Negotiations as Importers Seek Protections for Chinese Goods: Contractual Solutions

As importers seek protections against recalls of Chinese goods, negotiations often focus on liability insurance with products coverage. The following excerpted advice to importers may suggest opportunities for insurance providers.

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Managed Volatility

A New Approach to Equity Investing

Conventional investment wisdom says to earn outsized returns you need to take correspondingly outsized risks. Research, however, shows that taking less risk can yield surprising results—market-beating returns with less volatility.

SSgA research resulted in the development of a new class of investment strategies that we call “Managed Volatility.” These strategies are formed on the theory that portfolios can be constructed with lower risk characteristics than traditional market index portfolios and seek to deliver competitive returns. Our research, and research done by others, suggests that this can be accomplished, which makes a compelling case for insurers to boost their equity allocations.

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Industry Watch: Bond Insurers

Downgrades Possible for Bond Insurers

Bond insurer MBIA Inc. issued $1 billion surplus notes as part of its capital-raising plan to maintain its ratings standing among the three ratings agencies, but the successful close of the private offering, even though rival Ambac Assurance Corporation’s similar attempt to raise $1 billion through the sale of equity failed, may not be enough for MBIA to avoid a ratings downgrade.

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