Asset Liability Management and Asset Allocation for Property and Casualty Companies: The Final Frontier

This paper provides an overview of the asset liability management and investment process employed by USF&G. We call this five step process the asset liability management efficient frontier (ALMEF). The goal is to provide a framework for superior investment decision making. The five step ALMEF process is: 1. Economic evaluation of the balance sheet that considers the ongoing nature of the business 2. Evaluation of capital markets employing a stochastic economic simulation model 3. Surplus optimization utilizing a multi-time period non-linear optimization model that develops efficient frontier portfolios that explicitly consider the liability cash flows and characteristics, as well as being dynamically linked to changing capital market scenarios 4. Sensitivity testing of key asset, liability, and capital market factors 5. A performance measurement system that culminates in a liability benchmark index The process loops back to step one at various stages and is reevaluated on an ongoing basis. The result is a prospective investment policy and strategy that considers not only the liability profile for the existing balance, but also how the balance sheet will look going forward.