FM Global Says Bet on Stocks With No Upside Left in Bonds
Shivan Subramaniam, the chief executive officer of policyholder-owned commercial insurer FM Global, said there’s little room for gains in bonds after a multiyear rally, making stocks the more attractive investment.
“There’s no more upside left” for fixed-income holdings, Subramaniam, 63, said in an interview today in New York. “We fully expect to be fully invested on the equity side. That’s where we think the long-term opportunities are.”
FM Global invests a portfolio of more than $10 billion to back obligations on policies that guard against property losses and business interruption for corporate clients. The Johnston, Rhode Island-based insurer holds about 45 percent of its assets in stocks and counted Apple Inc., Exxon Mobil Corp., Chevron Corp. and JPMorgan Chase & Co. among its largest holdings as of Sept. 30, according to data compiled by Bloomberg.
U.S. bonds have returned 5.7 percent annually for the past five years through yesterday, according to Bank of America Merrill Lynch Index data. The Standard & Poor’s 500 Index gained 3 percent annually in the same period including dividends.
Five-year U.S. government bonds yield 0.74 percent, down from 2 percent at the end of 2010. Bond prices rise as yields decline. FM Global maintains a bond duration of about 4 years to reduce risks from rising interest rates, Subramaniam said.
“You’ve got to be careful with what you hold,” the CEO said. “I don’t think there’s any magic bullet right now.”
Falling bond yields means underwriters need to be more careful about charging insurance prices that are adequate to cover the risks they take on, Subramaniam said. When bond returns are higher, insurers can rely on investment results to post a profit, even when claims costs and expenses exceed premium revenue.
“The underwriting side needs to do even better than before,” he said.
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