A style factor approach can accomplish a few key goals for insurers. For yield enhancement, higher dividend-paying equity strategies can help avoid taking excessive risk in the fixed income portfolio. An equity style factor approach based on income can target companies offering above average dividend rates, helping insurers meet yield goals at the total portfolio level.
To mitigate drawdowns, a factor-based approach targeting minimum volatility provides a useful risk management tool. Low volatility equity strategies have demonstrated the ability to deliver higher risk-adjusted returns in the equity portfolio, and the resulting reduction in Value at Risk (VaR) may allow the insurer to redeploy risk to more attractive market segments.
Finally, insurers can use factors to adapt to changing market cycles. In fixed income, a defensive tilt might call for a shift toward bonds with longer duration and/or higher credit ratings, and a more aggressive tilt might call for the opposite. In a very similar way, a market cycle view can be expressed with equity style tilts targeting size, value, quality, and momentum. The ultimate goal: confirm that market insights and business-specific needs are properly reflected in the portfolio. Every little bit counts.
Equity Securities Risk: Equity securities are volatile and can decline significantly in response to broad market and economic conditions.